Country Reports - Ukraine

Country Reports - Ukraine
28 Oct 2016 Country Risk | Profile
Ourtake
The likelihood of lasting peace in the east is low.
Multiple pressures on the fragile government complicate reforms.
Ukraine is facing an external liquidity crisis as international currency reserves rapidly dwindle.
IMF provided USD17.5 billion in credit with an Extended Fund Facility conditioned on a programme of broad-ranging reform; EU financial support to follow.
Thelikelihoodoflastingpeaceintheeastislow. Fighting between government security
Country Risk Ratings (Strategic Risk) - Ukraine
forces and separatist militants in the eastern Donetsk and Luhansk regions temporarily
decreased once both parties began implementing the Minsk II February 2015 ceasefire but
Overall
only to reignite in November 2015; it was still ongoing in October 2016. The fighting, involving
3.5
both small-arms and RPGs but also mortars, artillery and Grad missile-launchers, continues
VERYHIGH
Political
3.8VeryHigh
Economic
3.8VeryHigh
Legal
3.3VeryHigh
Tax
3.0High
Operational
3.2VeryHigh
Security
3.6VeryHigh
along a geographically stable line of contact. Achieving a lasting peaceful solution in the east
is difficult due to the substantial divergence between Kiev's and Moscow's positions on issues
such as disarmament, amnesty and autonomy. The "unstable frozen conflict" is the best-case
scenario in the 12-month outlook.
Multiplepressuresonthefragilegovernmentcomplicatereforms. President Petro
Poroshenko's "Ukraine 2020" reform programme includes several packages of radical
economic and political reforms, including an anti-corruption drive. The International Monetary
Fund (IMF) has also set out reform conditions. However, the new government's ability to
implement reforms is limited owing to the continued military conflict, the substantially
weakened economy, the continued influence of the oligarchs, and the probable unpopular
impact of reforms. On the other hand, a failure to implement anti-corruption measures
expected by the general public could lead to renewed social unrest and political instability.
Ukraineisfacinganexternalliquiditycrisisasinternationalcurrencyreservesrapidly
dwindle. Falling exports, aggravated by weak industrial activity, as well downward pressure
on the hryvnia, have drained Ukraine's international reserves. Considering the prospects of
economic contraction, continued capital flight, and heavy debt service obligations, Ukraine is
Note: 0.1 = minimum risk, 10.0 = maximum risk.
Sovereign Risk Ratings - Ukraine

Medium Term Overall Rating / 100
60
B-60VERYHIGHPAYMENTSRISK
Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced
Economic and Sovereign Risk services.
expected to remain heavily dependent on concessional borrowing from international donors.

IMFprovidedUSD17.5billionincreditwithanExtendedFundFacilityconditionedonaprogrammeofbroad-rangingreform;EUfinancialsupportfollowed. After
three years of stalemate, Ukraine has unlocked cooperation with IMF, which has converted the existing Standby Arrangement to an Extended Fund Facility over four years.
The IMF credit facility, approved in March 2015, will help close a USD40-billion financing gap, including loans from other multilateral lenders and official bilateral credits as
well as USD15.3 billion from restructuring privately held debt. As a condition, Ukraine agreed to a four-year reform programme, including a series of austerity measures,
energy market reform, and maintenance of a more flexible exchange rate regime for the hryvnia. However, the successful delivery of the reform package by the new
Groisman cabinet is yet uncertain.
Forecastsummary
TherealGDPdeclinein2014acceleratedin2015,butIHSexpectsittoreversein2016. In the first quarter of 2014, Ukraines real GDP declined 1.1% year on year (y/y).
The decline accelerated to 4.7% y/y in the second quarter, 5.3% in the third quarter, and a staggering 15.2% in the fourth quarter. Violent confrontation between government
forces and pro-Russian separatists increasingly disrupted economic activity during the course of 2014. As violence escalated in eastern Ukraine in late summer 2014,
industrial production sunk to around 20% y/y. The deep political crisis within Ukraine and tense relations with its key trading partner and energy supplier, Russia, have taken a
heavy toll on industrial output and exports, private and government consumption, and fixed investment. Ukraine's economy was already seriously at risk before the outbreak of
violence because of the legacy of past policy mistakes and a dearth of official foreign-currency assets. The contraction accelerated to 9.9% in 2015 from 6.8% in 2014. Real
GDP should expand 0.5% in 2016, followed by a 1.3% increase in 2017, which is a downgrade from 1.4% reflecting the negative spillover from post-Brexit EU economic
activity.
Althoughforeign-exchangereserveshadbeenbolsteredbyaccesstomultilateralfinancingandimmediatedebt-servicepressureshavebeenremovedbecauseof
aprivate-debt-swapdeal,prolongeddelaysinacreditdisbursementfromtheInternationalMonetaryFund(IMF)couldonceagainthintheforeign-exchangebuffer
. Faltering exports, capital outflow, and a depreciating hryvnia have been putting extreme pressure on Ukraines international reserves. On 30 April 2014, the IMF agreed to a
two-year Standby Arrangement of USD17 billion and released two tranches before end-2014. The European Union and the United States had already made available EUR1.6
billion and USD1.0 billion, respectively, in loan guarantees. Contingent on the same conditions as the IMF agreement, the European Union will gradually release EUR11
2016IHS.
2016 IHS.. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement
between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and
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information or any statement contained herein.
page 1 of 43
billion in assistance. However, as foreign-exchange reserves sank below a minimally acceptable level, the Ukrainian government announced by end-2014 that it would need
an additional USD15 billion to meet its foreign debt repayment and service obligations, finance its current-account gap, and pay for natural gas imports from Russia (including
an outstanding bill for 2013 and 2014). To meet Russian demands, Ukraine had already requested an additional credit of EUR2 billion from the European Union. In March
2015, the IMF replaced the existing Standby Arrangement with the Extended Fund Facility (EFF), entailing a larger sum for a longer period; in return, Ukraine agreed to a
four-year program of deep structural reform. The EFF, equivalent to USD17.5 billion, is part of a USD40-billion package from a consortium of multilateral and bilateral lenders.
Ukraine gained breathing room after sealing a USD15.8-billion debt restructuring deal with four of its private creditors, reducing its overall external debt by USD3.6 billion to
USD15.5 billion and pushing debt repayment beyond 2018, when the IMF program is to expire.
Inflationacceleratedthroughout2015,owingtodownwardpressureonthehryvniasexchangerateandasignificantone-offutility-priceincreaseinApril2015.It
willremainelevatedin2016whileutilitytariffadjustmentcontinues,butwilldecelerateowingtothestabilizingexchangerateandstatisticalbaseeffect. As
forecast, a deflationary phase ended in November 2013, helped along by increasing food prices and 100 basis points of cumulative rate cuts by the National Bank of Ukraine (
NBU) in early June and August 2013 (bringing the policy rate down to 6.5%). The devaluation of the hryvnia, driven by the political turmoil that started in November 2013 and
the central banks inability to support the UAH7.99/USD1.00 quasi-pegged exchange rate (due to low foreign-currency reserves), led the currency to eventually lose around
70% of its value by late February 2015. The devaluation of the hryvnia, a nearly threefold increase in domestic gas prices, and a 40% rise in utility costs drove up consumer
prices, pushing y/y inflation to 60.9% by end-April 2015. The hryvnias weakness and runaway inflation forced the NBU to hike the discount rate to 30.0% by March 2015,
although the NBU since cut its main rate to 27.0% in August, 22.0% in September 2015, 19.0% in April, 16.5% in June, 15.5% in July, and 15.0% in September 2016. As we
forecast, consumer price inflation averaged 48.7% in 2015.
Changessincelastforecast
OctoberinterimforecastversusSeptemberinterimforecast
GDP
UP
Real GDP is expected to post mild growth in 2016, revised up from a small contraction because of better-than-expected second-quarter
real GDP results.
Consumer price
STABLE
inflation
Industrial
We see inflation averaging 12.9% in 2016, slightly up from the 12.7% forecast in August, owing to the hryvnia's depreciation against the
US dollar.
STABLE
production
Ukraines industrial capacity is recovering from a low base, but the recovery will be muted because of weaker Eurozone demand for
Ukrainian exports in 201617.
Politicalsummary
Presidentialelections
Next contest: 2019 May; Last contest: 25 May 2014.
Legislativeelections
Next contest: 2019 October; Last contest: 26 October 2014.
HeadofState
Petro Poroshenko (since 7 June 2014)
PrimeMinister
Volodymyr Groysman (since 10 April 2016)
DeputyPrimeMinister
Dmytro Shymkiv (since 1 September 2015)
DeputyPrimeMinister
Ivanna Klympush-Tsyntsadze (since 1 September 2015)
DeputyPrimeMinister
Pavlo Rozenko (since 2 December 2014)
DeputyPrimeMinister
Stepan Kubiv (since 3 February 2016)
DeputyPrimeMinister
Volodymyr Kistion (since 1 September 2015)
DeputyPrimeMinister
Vyacheslav Kyrylenko (since 2 December 2014)

2016 IHS
Source: IHS and CIRCA People in Power
KeyMacro-EconomicIndicators
RealGDP(%change)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2.3
-14.8
4.1
5.5
0.2
0.0
-6.6
-9.9
0.5
NominalGDP(US$bil.)
180.0
117.2
136.0
163.2
175.8
183.3
133.3
90.5
90.2
NominalGDPPerCapita(US$)
3,910
2,558
2,980
3,588
3,879
4,059
2,963
2,019
2,022
ConsumerPriceIndex(%change)
25.2
15.9
9.4
8.0
0.6
-0.3
12.2
48.7
12.9
ExchangeRate(LCU/US$,endofperiod)
7.70
7.98
7.96
7.99
7.99
7.99
15.77
24.00
25.30
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast
update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.
Businessenvironment-strengthsandweaknesses
2016IHS.
page 2 of 43
Strengths
Weaknesses
Geographical location as a key transit route between Europe, Russia, and the
Strong political and economic influence of certain powerful businessmen, often
Black Sea; physical proximity to the EU market.
owning media assets and involved in politics at all levels.
Improved regulatory environment following accession to the World Trade
Continued armed conflict in the east of the country and persistent political instability
Organization (WTO).
in Kiev.
Large, trained, and educated workforce, and significant industrial and agricultural
Widespread corruption at all levels despite declared government efforts to tackle it.
capacity.
EU Association Agreement facilitating bilateral trade and IMF-mandated reforms
Deteriorated relations with Russia leading to trade restrictions and bans, including of
to improve business environment in the long term.
transit to Central Asia.
Countryrisk-overallstatement
Ukraine's internal stability has been severely undermined since the beginning of 2014. Mass anti-government protests in November 2013February 2014 turned violent and
eventually resulted in former president Viktor Yanukovych being deposed and impeached by parliament and fleeing the country after over 100 people had died in Kiev. This
sparked a sequence of events which saw Russian military forces deployed to Crimea to support pro-Russian separatists, and a subsequent 16 March 2014 referendum that
formalised the peninsula's annexation by Russia. Since then the generally pro-Western governments in Kiev had to juggle its efforts to deter the armed conflict in the east of
the country, where the separatist militants received financial, political and military support from Russia to gain control over about 35% of the land area of Donetsk and
Luhansk regions, and the challenges of the political, judicial and economic reform and the anti-corruption drive. Since February 2015, following signing the Minsk II ceasefire
agreement and the loss of Debaltseve, an important rail and road hub, to the separatists, the line of contact in Donbass remained quite stable, reinforced by both warring
parties. The armed conflict in the east, with its periods of de- and re-escalation, is most likely used by Russia as a lever to destabilise Ukraine from within; Russian military
involvement in the conflict stopped short of an open invasion. Continued armed conflict, elevated risks of terrorism and protests and riots have led to a significant increase in
the security risk scores for the country, including areas outside the conflict hotspot in Donbass. Against this backdrop, Ukraine's economy has continued to struggle, despite
financial help from the IMF and from the Western donors. The change of the cabinet in April 2016 increased government instability, further damaging Ukraine's economic
prospects. However, the fragile coalition government survived its first six months in the office and with the improving macroeconomic indicators is likely to survive into 2017.
Political:Countryriskstatement
President Petro Poroshenko, elected in May , and the new coalition government formed in April 2016 face a challenging task in balancing the interests of the different regions
and power groups in Ukraine while pursuing urgent reforms to strengthen the country's fragile economy. Unresolved conflict with the pro-Russian separatists in the east
makes further distancing of Kiev from Moscow more likely, negatively affecting bilateral trade even further. Meanwhile, the influence of powerful businessmen and corruption
will likely remain strong, increasing the risks of political instability, including at the regional level.
Governmentstability
The parliament turned increasingly anti-Russian in the October 2014 election, complicating prospects for peace in the eastern regions. The divisions between all sides of the
conflict in the east of the country Russia, Ukraine, and the separatists remain substantial. The Ukrainian parliament passed a bill on 26 January 2015 classifying the
Luhansk People's Republic (LPR) and Donetsk People's Republic (DPR) as terrorist organisations. On 27 January, it voted to define Russia as an "aggressor state" in the
conflict. On 17 March, the Ukrainian parliament designated areas under control of the LPR and the DPR as having "occupied status". These combined responses will make
the current ceasefire challenging despite the Western sanctions against Russia.
In April 2016 former prime minister Arseniy Yatsenyuk stepped down following four months of a political impasse and behind-the-scenes negotiations on the formation of a
new cabinet. He was replaced on 14 April 2016 by the former Verkhovna Rada (VR) speaker Volodymyr Groisman. The new coalition government consists of the presidents
Petro Poroshenko Bloc (Blok Petra Poroshenka, BPP) and Yatsenyuk's People's Front (Narodnyi Front, NF), who now jointly control 230 votes in the VR, just above the
majority of 226. The fragile ruling coalition now has to rely on support from other parliamentary factions and groups during votes on important matters, including the new
cabinet appointment in April 2016. Under these circumstances, implementation of wide-ranging reforms, including of the anti-corruption drive, will be difficult to achieve, taking
into account fractured interests of the key political groups represented in the VR. This will be especially the case as Ukraines oligarchs hold a stronger influence of the current
Groisman cabinet, which is mostly filled with political appointments and lacks experienced and competent technocrats.
Failure to implement the reforms by the new Groisman government will increase anti-establishment sentiment and the risk social unrest. IHS Markit assesses that conditions
persist for renewed unrest in Ukraine if the government is unable to proceed relatively quickly with Poroshenko's promised reforms as outlined in his Strategy for 2020 paper,
which included 60 separate packages of radical economic and political reforms. However, there is a high risk of protests around the reforms that the IMF requires the
government to implement as part of the USD17.5-billion programme approved in March 2015, with pension and labour reforms. The fact that the Kiev government has been
unable to achieve a durable ceasefire in the east despite multiple rounds of sanctions against Russia and two agreed ceasefires, gives further support to increasingly vocal
nationalists groups. If the government fails to respond to the concerns about the continuing conflict and the impact it is having on a contracting economy, or if there are
perceived to be excessive delays in the full implementation of reforms, renewed political turmoil becomes likely. These could possibly lead to the removal of Poroshenko as
president and propel radical nationalist politicians to power.
2016IHS.
page 3 of 43
Politicalsummary
Presidentialelections
Next contest: 2019 May; Last contest: 25 May 2014.
Legislativeelections
Next contest: 2019 October; Last contest: 26 October 2014.
HeadofState
Petro Poroshenko (since 7 June 2014)
PrimeMinister
Volodymyr Groysman (since 10 April 2016)
DeputyPrimeMinister
Dmytro Shymkiv (since 1 September 2015)
DeputyPrimeMinister
Ivanna Klympush-Tsyntsadze (since 1 September 2015)
DeputyPrimeMinister
Pavlo Rozenko (since 2 December 2014)
DeputyPrimeMinister
Stepan Kubiv (since 3 February 2016)
DeputyPrimeMinister
Volodymyr Kistion (since 1 September 2015)
DeputyPrimeMinister
Vyacheslav Kyrylenko (since 2 December 2014)
2016 IHS
Policydirectionandpredictability
Policy implementation has been overshadowed by the current crisis. In the wake of the overthrow of Viktor Yanukovych in late February 2014 and the subsequent armed
conflict in the east of the country, domestic policy has taken a back seat to crisis response. Policy direction has also been hampered by government instability. Ukraine is
currently ruled by the third post-Euromaidan government: in April 2016 a fragile coalition of Petro Poroshenko Bloc and the People's Front was formed. The new cabinet
headed by Prime Minister Volodymyr Groisman promised to continue with the policy of moving towards closer links with the European Union and wide-ranging reforms on
governance and anti-corruption drive. However, policy implementation in the past two years has been constrained by the ongoing conflict with pro-Russian separatists in the
east, the rapidly deteriorating economic situation, and continued political infighting among the various political groups centred around key individuals, such as politicians or
businessmen. While the implementation of the free trade agreement with the EU became provisionally effective since January 2016, many other promised reforms are yet to
be implemented. The government's detailed policy implementation will likely become clearer once the conflict in the east subsides and resources can be devoted to other
policy areas, which is unlikely to happen in the six-month outlook.
The influence of powerful businessmen is likely to remain strong. Since Ukraine's independence in 1991, politics and business have been almost synonymous. Powerful
businessmen, often referred to as oligarchs, have now become an integral feature of Ukraine's political landscape given that wealth and industrial assets are tightly
concentrated in the hands of just several dozen individuals. This dynamic is unlikely to change in the foreseeable future because all established political parties rely on such
businessmen for funding and access to prime-time television, as all leading television channels are owned by businessmen with extensive commercial interests outside of the
media. The ouster of President Viktor Yanukovych and his government in early 2014 did not result in a substantial shift in oligarchic politics, both at the central and the
regional levels. Ukraine's most influential businessmen Ihor Kolomoiskyi and Rinat Akhmetov allegedly played a key role in negotiations that led to resignation of former
prime minister Arseniy Yatsenyuk and appointment of Groisman in April 2016 The current president, Petro Poroshenko, is himself a powerful businessman, and is frequently
accused of corruption or conflict of interest allegations by the Ukrainian media and opposition politicians (Poroshenko denies the allegations). In short, Ukraine's political class
is too deeply entrenched and dependent on the country's small but wealthy business community for these links to be broken over the short-to-medium term.
Oppositionprospectsandprogramme
The overthrow of the former president in February 2014 and the subsequent political crisis have left the former ruling party in opposition and weakened. Following the ouster
of Viktor Yanukovych, formation of an interim government, election of a new president in May 2014 and the new parliament in October 2014, the former ruling Party of
Regions (PoR) lost most of its influence, especially in Kiev. In April 2014 it was re-established as the Opposition Bloc (OB), which is now the main opposition party to the
current pro-reform and pro-Western government. It has been badly weakened by the change in Ukraine's leadership in early 2014 and the subsequent events in Crimea and
Donbass. Overall the party's support has essentially been reduced to its core base in parts of eastern and southern Ukraine. The PoR candidate in the 25 May 2014
presidential election, Mykhailo Dobkin, only received 3.03% of the vote in the first round. In the 26 October 2014 parliamentary election, the Opposition Bloc received 9.43% of
the vote, securing 27 seats in the parliament. The OB fared similarly in the regional elections on 25 October 2015, where it came fourth in the overall result. However, it
received formidable results in some of the eastern and southern regions where most Russian-speakers live. It received the highest number of votes in city council elections in
Dnipro (formerly Dniepropetrovsk), Mariupol, Mykolayiv, and Zaporizhia, as well as in regional assembly elections in Dniepropetrovsk, Mykolayiv, Odessa, and Zaporizhia
regions.
2016IHS.
page 4 of 43
ParliamentSummary
Partyabbr.
Partyname
Seats
BPP
Petro Poroshenko Bloc
132
Ind
Independents
96
PF
People's Front
82
Self-reliance
33
OB
Opposition Bloc
29
Vacant
Vacant
27
RP
Radical Party of Oleh Lyashko
22
All-Ukrainian Union "Fatherland"
19
Others
Others
10
SupremeCouncil
Data reflects seat distribution following last election Source: IHS and CIRCA People in Power
2016 IHS
Economic:Countryriskstatement
Ukraine is facing the difficult task of rebalancing its economy, which has long suffered from twin current-account and budget deficits, compounded by large debt repayment
and service obligations. The authorities have committed to a multiyear reform roadmap recommended by the International Monetary Fund. As part of this process, the
government introduced a painful but necessary 50% domestic gas-price increase on 1 May 2014, followed by a similar rise on 1 April 2015. After extended resistance, Ukraine
s central bank was forced to let the hryvnia float in 2014 and started transitioning to inflation targeting. However, the austerity measures are curtailing short-term economic
growth, with most of the sectors of the economy remaining in negative territory. The low-intensity armed conflict between the central government and the two pro-Russian
eastern regions, a crisis in relations with Russia, and the grave domestic political rift along ethnic lines are all seriously undermining authorities efforts to rebuild the economy.
Both consumer and business confidence remain low, not helped by ongoing political infighting, poor confidence in the sovereigns creditworthiness, and a sizable government
debt-amortization schedule in the medium term. Risks for a deep double-digit recession similar to 200809 remain very low after the economy bottomed out from its dive in
2015.
Short-termoutlook
The real GDP decline in 2014 accelerated in 2015, but IHS expects it to reverse in 2016.
Although foreign-exchange reserves had been bolstered by access to multilateral financing and immediate debt-service pressures have been removed because of a
private-debt-swap deal, prolonged delays in a credit disbursement from the International Monetary Fund (IMF) could once again thin the foreign-exchange buffer.
Inflation accelerated throughout 2015, owing to downward pressure on the hryvnias exchange rate and a significant one-off utility-price increase in April 2015. It will
remain elevated in 2016 while utility tariff adjustment continues, but will decelerate owing to the stabilizing exchange rate and statistical base effect.
activity.
2016IHS.
page 5 of 43
Assumptions
Ukraine successfully completes the program of the Extended Fund Facility (EFF) approved by the International Monetary Fund (IMF) in March 2015, including a
multiyear program of deep structural reforms. Despite a difficult external liquidity position, the government continues servicing its debt. The external debt service has
become easier after Ukraine finalized a USD15.8-billion private debt restructuring by end-November 2015, securing USD3.5 billion in direct savings through a 20%
haircut, and extension of debt maturities.
The National Bank of Ukraine gradually moves to inflation targeting, permitting the hryvnia to freely float against the US dollar within a confidence band by end-2016.
The hryvnia is expected to continue appreciating through the second half of 2016 as foreign-exchange reserves are bolstered by new tranches of credit. The central
bank is unlikely to return to the rigid peg regime favored by the previous authorities, and the hryvnia is expected to remain relatively weak in US dollar terms in the
medium term.
Ukraine will continue hemorrhaging human capital through emigration. Nevertheless, remittances from migrants will provide an inflow of foreign currency and support
private spending, even in the longer term.
Changessincelastforecast
OctoberinterimforecastversusSeptemberinterimforecast
GDP
UP
Real GDP is expected to post mild growth in 2016, revised up from a small contraction because of better-than-expected second-quarter
real GDP results.
Consumer price
STABLE
inflation
Industrial
We see inflation averaging 12.9% in 2016, slightly up from the 12.7% forecast in August, owing to the hryvnia's depreciation against the
US dollar.
STABLE
production
Ukraines industrial capacity is recovering from a low base, but the recovery will be muted because of weaker Eurozone demand for
Ukrainian exports in 201617.
Alternativescenarios
Protracted conflict in eastern and southeastern Ukraine and a diplomatic standoff with Russia, involving punitive trade sanctions and cuts to gas supplies, further
aggravate Ukraine's economic situation, while political gridlock in implementing required reforms derails the rescue led by the International Monetary Fund (IMF). The
country defaults on its foreign debt-service and repayment obligations.
Painful IMF austerity measures trigger further political unrest across the country, and political infighting worsens. Despite assistance from multilateral and bilateral
lenders, the country descends into an even more severe and prolonged economic and financial crisis.
With capital markets effectively shut to Ukraine and domestic banks reluctant to purchase government bonds despite very wide spreads and the collapse of a deal with
the IMF, the government accumulates payment arrears and issues local currencydenominated Treasury bills, which end up in the central bank's vault. Capital flight
accelerates and triggers an acute balance-of-payments crisis, the hryvnias exchange value plummets, and inflation surges even further, throwing Ukraine's fragile
economy deeper into double-digit recession.
In a more optimistic scenario, a rebound of Ukraines exports, combined with IMF assistance, strong results in fighting corruption, and a diplomatic solution to a standoff
with Russia, eases liquidity concerns and engenders a stronger economic recovery than currently expected.
2016IHS.
page 6 of 43
KeyMacro-EconomicIndicators
RealGDP(%change)
2012
2013
2014
2015
2016
2017
2018
2019
2020
0.2
0.0
-6.6
-9.9
0.5
1.3
2.0
3.4
3.5
NominalGDP(US$bil.)
175.8
183.3
133.3
90.5
90.2
102.4
116.6
136.0
159.9
3,879
4,059
2,963
2,019
2,022
2,306
2,639
3,097
3,660
0.6
-0.3
12.2
48.7
12.9
7.0
5.4
4.7
4.5
PolicyInterestRate(%)
7.50
6.50
14.00
22.00
13.50
9.00
7.00
5.50
5.50
FiscalBalance(%ofGDP)
-3.6
-4.3
-4.5
-3.5
-2.9
-2.0
-1.6
-1.2
-1.2
45.32
45.17
45.00
44.82
44.62
44.41
44.17
43.93
43.68
8.1
7.7
9.7
9.5
9.6
9.1
8.1
7.0
6.8
CurrentAccountBalance(%ofGDP)
-8.2
-9.0
-3.4
-0.2
-0.6
-0.4
-1.4
-1.5
-1.9
BOPExportsofGoodsUS$bn
64.4
59.1
50.6
35.4
32.7
33.4
35.0
38.1
41.4
BOPImportsofGoodsUS$bn
86.3
81.2
57.7
38.9
40.6
44.1
48.2
52.4
56.8
7.99
7.99
15.77
24.00
25.30
24.05
22.89
21.40
19.76
Population(mil.)
UnemploymentRate(%)
Medium-andlong-termoutlook
Ukraineseconomywillbegintorecoverin2016,butthepaceofrecoverywillcruciallydependonpolicyreforms,gas-sectorrestructuring,improvingbusiness
conditions,EurozonedemandforUkrainianexports,andthenormalizationoftraderelationswithRussia. Ukraines economy is suffering from structural shortcomings,
rooted in ill-conceived state policies and from the effects of violent conflict in the countrys heavily industrialized easternmost regions. The poor outlook for quick resolution of
the internal and foreign policy crisis bears serious risks for Ukraines economy. Domestic impediments to growth still include unsustainable fiscal policies and gas subsidies
that the new government has pledged to scrap by 2017. The period of austerity measures will continue dampening private consumption. Ukraine is unlikely to attract foreign
capital anytime soon. Foreign-exchange reserves are low, although not critically. It will take some time for the new governments promises, including improvement of the
business environment, to materialize, especially considering the emergence of disagreements within the pro-European bloc. The recovery is going to be lackluster in the
medium term. Business conditions, including the regulatory framework and the rule of law in general, would need to improve considerably for growth to gather more traction.
Building a business-friendly environment in Ukraine is a gradual and cumbersome process that will suffer many setbacks during the forecast period.
EconomicconvergencewillnotbeachievedwithWesternEuropebeforetheendoftheforecasthorizon. Ukraine will gradually catch up with the poorest countries in
Western Europe in terms of per capita income during the next 30 years, but a large income differential with the average for the region will prevail. This forecast takes into
account our assumption that productivity will be undermined by an aging and declining population because of low birth and health problems. Moreover, with Ukraine remaining
on the fringe but not inside the European Union, the country is at a clear disadvantage compared with its western neighbors.
Ukrainesexportprofilewillremaindependentonalimitednumberofcommodities. The exports outlook could be promising in the coming months, with a free-trade
agreement already in force since 1 January 2016 and near-term potential for the UkraineEuropean Union Association Agreement. Meanwhile, Ukraines dependence on a
2016IHS.
page 7 of 43
limited number of export commodities, including metals and grain, is unlikely to end anytime soon. An undiversified export profile will keep it volatile in the coming years.
Moreover, robust export growth requires a rules-based and transparent value-added-tax system as well as less-discretionary state interference in the form of quotas,
especially in agriculture. We assume that the business environment will gradually improve in this respect.
Inflationwillremainproblematic,evenafterthehryvniastabilizes. Although it will slowly decelerate beyond the very near term, inflation will remain relatively high in the
longer term because of looser monetary policy and rising domestic retail energy prices. Moreover, as the Ukrainian economy narrows the gap with its Western neighbors in
terms of per capita income, wage growth, and price increases for nontradable goods (such as services) and real estate, inflation will stay solidly above average European
levels. A supply-side shortage in food markets may still occur from time to time and temporarily boost inflation.
Structuraldeficienciesimpairahigherpotentialgrowthrateinthelongterm. The debt burden rose sharply during the 200809 crisis and once again after the 2014
popular uprising and subsequent fallout with Russia. The debt burden will continue to put pressure on Ukrainian authorities ability to afford relaxed fiscal policies in the
coming years. Moreover, the cost of hefty pension payments in the future will be a heavy liability on public finances. Ukraines infrastructure, including road and railroad
networks, requires huge investments, especially in the eastern regions battered by the armed conflict. More sophisticated financial markets, including debt markets for local
and regional governments, could improve the public sectors ability to raise funds and finance larger projects once the economy is on a steadier footing. Enhancing
transparency in Ukraines notoriously shady and corrupt energy sector is of prime importance, while the heavily regulated agricultural sector could cause another food-price
crisis before reforms and deregulationincluding establishing a functioning market for landare implemented.
Growth
GDP
Ukraine'soutlookiscloudedbypoliticalinstability,alopsidedeconomywithalargestructuraltradegap,andweakexternaldemand;however,thestruggling
economywillreturntogrowthin2016,withfinancialhelpfromtheInternationalMonetaryFund(IMF)andEuropeanUnion. Following a marginal gain of 0.2% in 2012
, the economy stagnated in 2013, facing numerous hurdles throughout the year. However, economic recession returned in 2014, stymied by an external-payments crisis and,
after the first quarter, a widening conflict with rebels in the eastern industrial heartland. On top of the 6.8% decline in 2014, the economy fell 9.9% in 2015. Real GDP
collapsed a staggering 17.2% in first-quarter 2015, followed by a 14.6% drop in the second quarter, although by the third quarter, the rate of contraction has slowed down to
7.0%. The real GDP contraction slowed to 3.3% in the last quarter of 2015. We expect the GDP growth to return in 2016, but only at a mere 0.5%, followed by a 1.3% rise in
2017.
Near-termeconomicactivitywillbemutedbecauseofthegovernmentsrebalancingeffortsandthedisruptionoftradewithRussia. In addition, Ukraine will continue
to face challenging external demand conditions, which will drag down the overall GDP performance in 201617. Fixed investment will remain deep in negative territory, amid
heightened uncertainty about the economic environment and geopolitical tensions. Furthermore, the belt-tightening measures that the new Ukrainian authorities have agreed
to with the IMF have already sent private consumption into a sharper dive. Increased gas prices and accelerated inflation, along with public-sector job cuts, will continue
weighing heavily on households confidence and budgets. However, increased integration with the European Union through the free-trade deal will engender inflows of
investment and a rise in trade volumes, albeit not immediately.
EconomicGrowthIndicators
2013
2014
2015
2016
2017
2018
2019
2020
RealGDP(%change)
0.0
-6.6
-9.9
0.5
1.3
2.0
3.4
3.5
RealConsumerSpending(%change)
5.2
-6.2
-15.8
-0.8
2.1
3.1
4.1
4.0
RealGovernmentConsumption(%change)
-0.9
1.1
1.0
-2.0
1.1
0.8
1.0
1.1
RealFixedCapitalFormation(%change)
-8.4
-24.0
-9.3
-0.5
-7.1
1.1
1.6
3.0
2016IHS.
page 8 of 43
RealExportsofGoodsandServices(%change)
-8.1
-14.2
-16.9
-6.7
1.8
3.9
5.0
5.7
RealImportsofGoodsandServices(%change)
-3.5
-22.1
-22.0
-6.2
2.7
5.3
6.3
4.9
NominalGDP(US$bil.)
183.3
133.3
90.5
90.2
102.4
116.6
136.0
159.9
4,059
2,963
2,019
2,022
2,306
2,639
3,097
3,660
Consumerdemand
Consumerspendingcontractedadramatic15.8% in2015,owingtoasharpriseinconsumerpricesandunemployment,thecontinuingmilitarystandoffinthe
Donbasregionparalyzingthesupplyside,andalargedevaluationofthehryvnia. Consumer price inflation was dampened by weak staple food prices until mid-2012
and entered negative territory in 2013. However, the interest-rate cuts by the central bank in early June and August 2013, combined with the nearly 40% devaluation of the
hryvnia since the start of the political turmoil in November 2013, generated higher rates of consumer price inflation that have only been accelerated by the weakening of the
hryvnia. By end-December 2014, it climbed to a 2014 high of 24.9% and headed even higher thereafter, reaching a historical high of 60.9% in April 2015, when a threefold
domestic gas-price increase and a 50.0% utility-price increase were introduced. Enormous inflation has been eroding Ukrainian consumers real purchasing power and
contributing to a sharp retreat in household spending, which has somewhat dampened inflation. Households have seen large-scale job cuts in the wake of severe capital flight
and plummeting investments, as well as required fiscal tightening. Still, private consumption will remain more resilient than other components of domestic demand, evidenced
by stronger growth in retail sales and partially explained by employment in the informal economy. After dropping 5.9% in 2013 and 7.4% in 2014, private consumption
declined 15.8% in 2015. According to our October forecast, it will contract a mild 0.8% in 2016 before returning to modest growth of 2.1% in 2017.
Capitalinvestment
Investmentactivitywilllikelycontractuntil2018,drivenbypoliticalrisks,ashortageofcredit,poorbusinessconfidenceaffectedbyUkraine'sfinancialfragility,
andpotentiallylong-termfalloutwithUkrainesmajortradingpartner,Russia. Capital spending in Ukraine will remain crippled by a highly volatile domestic political
environment, heightened geopolitical tensions with Russia, banking-sector weakness, a difficult investment environment, and a still uncertain global outlook. Ukraine has
experienced severe capital flight in recent years, and investment is not projected to rebound until 2018 at the earliest, according to our October forecast. Ripple effects from
the hryvnias devaluation added to uncertainty and undermined foreign investors' confidence. Nevertheless, the low level of investment activity would allow for a relatively
strong rebound under more benign conditions, for companies have a considerable backlog of investment projects. The official start of the free-trade agreement with the
European Union will help firms benefit from increased free trade with the European Union and an improving business environment, although the latter is unlikely to materialize
quickly.
Labormarkets
Unemploymentisexpectedtoeasemarginallyin2016afterpeakingat9.9%atend-2015,accordingtotheOctoberrecast,butthislikelyignoresthesituationin
thetworebelregionsintheeast,wheremostproductiveactivityhasceasedandasizeableshareofthepopulationhasbeendisplaced. As for the rest of the
economy, we expect little progress in bringing the official rates down significantly in the near term, partially owing to the existing large informal economy. Contracting domestic
demandin addition to military mobilization, a highly unstable business environment, faltering exports, and a volatile currencywill force Ukraines industry to cut costs and
downsize capacity, raising redundancies. The negative output gap will keep labor-cost pressures at bay, but push unemployment up again.
WageconvergencewithCentralEuropewillresumeoncegrowthreturnstoarecoverypath. Comparatively, wages in Ukraine are very low. This should give the
country competitive advantage in terms of input costs vis--vis exports in key markets and imports in the domestic market in the aftermath of the current weak patch.
Economic convergence with Ukraines European neighbors in terms of wages and per capita income will resume again in the longer term. Concurrently, wages and salaries
will rise rapidly as productivity measures improve again. Even so, glaring wage differentials will remain for the foreseeable future.
DemographicdeclineandmigrationarerestrainingUkrainesgrowthpotential. Ukraines labor force will continue to shrink as a result of demographic decline due to low
life expectancy, natural growth, and emigration. There is currently no sign that the downward trend in Ukraines population will halt or even slow any time soon, unless income
convergence and living standards move closer to Western European levels. Critical shortages for skilled workers will remain a concern during the recovery period and in the
medium term.
Inflation
Inflationhassoaredtohistoricallyhighlevelsonthebackofaweakercurrencyandshotupowingtotheenergy-priceincrease. According to our October forecast,
inflation will average 12.9% in 2016, following annual averages of 48.7% in 2015 and 13.4% in 2014. This follows 0.3% deflation in 2013 and a weak 0.6% year-on-year (y/y)
price increase in 2012. Consumer prices started rising in the first three months of 2014, reaching 1.7%, and climbed to 11.6% in June 2014 after the abandonment of the
hryvnias peg to the US dollar at the end of the first quarter. This prompted the National Bank of Ukraine to hike the discount rate 300 basis points. The relentless increase in
2016IHS.
page 9 of 43
the consumer price levels was driven by the hryvnias devaluation and sharp increases in the domestic price of natural gas (up 50% effective 1 May 2014, and a threefold rise
effective 1 April 2015); the annual inflation reached 24.9% by December 2014, with the discount rate pushed up to 19.5%. By the end of March 2015, inflation surged further
to 45.8% y/y, forcing the National Bank of Ukraine to raise its discount rate to 30.0%. In April 2015, inflation reached 60.9%, largely driven by a one-off increase in energy
prices, and by further losses in the hryvnias value against the US dollar.
Producerpriceswillcontinuetoreflecttrendsinglobalcommodityprices,theexchangerate,andthenaturalgasimportpricefromRussia. Ukraines producer
price levels will continue to be driven by global commodities prices (mainly metals and steel) and the hryvnia exchange rate. Producer price inflation is sensitive to the price of
imported Russian gas, which soared to USD486/thousand cubic meters (Mcm) from USD268/Mcm shortly after the February 2014 government change in Ukraine. Since then,
Ukraine has managed to negotiate temporary price cuts during winter. However, the final gas price has yet to be determined. Ukraine typically relies on Russia for as much as
half of its annual gas supply, but it has attempted to make it through the winter by fulfilling a good share of this total through reexports of Russian gas from other countries in
Central and Eastern Europe, domestic production, and increased energy efficiency.
InflationIndicators
2013
2014
2015
2016
2017
2018
2019
2020
-0.3
12.2
48.7
12.9
7.0
5.4
4.7
4.5
Wholesale-ProducerPriceIndex(%change)
-0.1
17.2
35.9
14.8
6.6
5.5
5.1
4.5
Exchangerates
Policymakerswillcontinueallowingthehryvniatofloatinthecomingmonthstorelievepressureonthecountrysforeign-exchangereserveswithonlylimited
intervention. The National Bank of Ukraine (NBU) stuck to its rigid exchange-rate strategy during 201213, despite calls from the International Monetary Fund (IMF) and
domestic exporters for a more flexible exchange-rate policy. Consequently, Ukraines current-account deficit widened. Russias USD15-billion bond-buying commitment
offered some relief in December 2013, but the popular uprising and the change of government led to scrapping of this program, putting the hryvnias value on a downward
trajectory. The central bank has since allowed the hryvnia to float, leaving behind the rigid peg of UAH7.99/USD1.00. We projected a more-than-15% devaluation of the
hryvnia in our earlier forecasts in 2013, but the devaluation has been far more severe than expected because of geopolitical developments and associated capital flight. The
hryvnia has now lost around 70% of its value against the dollar since the peg was abandoned. The NBU is unlikely to return to a quasi-peg regime because of a lack of
sufficient international currency reserves to prop up the hryvnia and a commitment to an IMF credit-line deal.
WearguecurrencydevaluationwasinevitabletostemUkraine'swideningexternalliquiditygap. The external liquidity gap (with the main components being the
current-account deficit, maturing short-term debt, principal repayments for maturing long-term debt, and interest payments on existing sovereign debt) reached 137.6% of total
external foreign-exchange earnings in 2012, 152.0% in 2013, and 150.9% in 2014. Furthermore, the countrys foreign-exchange reserves have declined sharply recently.
They stood at a meager USD4.7 billion at end-February 2015, compared with USD13.6 billion a year earlier, but the initial two disbursements under the new IMF Extended
Fund Facility boosted them back to USD12.36 billion by end-December 2015 and remained around that level as of June 2016. Meeting the countrys external liquidity
requirements is now dependent on further multilateral and bilateral assistance. Ukraine thus remains vulnerable to a liquidity crisis through the medium term. The country
desperately needs to start generating more foreign exchange through exports to plug the gap, although the sharp contraction of domestic demand is slashing imports.
2016IHS.
page 10 of 43
ExchangeRateIndicators
2013
2014
2015
2016
2017
2018
2019
2020
7.99
15.77
24.00
25.30
24.05
22.89
21.40
19.76
ExchangeRate(LCU/US$,periodavg)
7.99
11.90
21.87
25.43
24.63
23.51
22.18
20.80
ExchangeRate(LCU/Euro,endofperiod)
11.02
19.14
26.13
27.83
26.09
26.21
25.60
24.49
ExchangeRate(LCU/Euro,periodavg)
10.61
15.79
24.26
28.35
26.56
26.21
26.04
25.36
ExchangeRateandCPITables
Policy
Monetarypolicy
ThefocusoftheNationalBankofUkraine(NBU)willshiftfrommanagingthehryvniasexchangeratetoinflationtargetingthroughout2016. Ukraines new
monetary policymakers have indicated their firm plans to move to inflation targeting from defending a peg to the dollar. The decision was also a result of the NBUs inability to
make currency-market interventions owing to a lack of sufficient foreign-exchange reserves. The former NBU chairman Stepan Kubiv stated in 2014 that the NBU will fully
move to inflation targeting by April 2015. This target was missed, and in the best-case scenario, the transition could happen by end-2016. High inflation remains the main
obstacle to the switch. Still, the new approach is a departure from the previous authorities contradictory policies. Previously, the NBU had conflicting targets of stimulating
bank lending and absorbing excess liquidity on the interbank market to reduce risks of a speculative attack on the exchange rate. This amounted to a rather inconsistent
policy strategy that, on the one hand, focused on steering banking-sector liquidity by selling certificates of deposits or conducting transactions with government securities, and
on the other hand, focused on frequent interventions on the foreign-exchange market.
TheNBUcutitspolicyrateto15.0%inSeptemberfrom15.5%inJulyaftercuttingitto16.5%inJune2016from19.0%inApril,followingasharpincreasetoa
peakof30.0%inApril2015. The rate increases were to defend the hryvnia, curb the sharp rise of consumer price inflation, and stabilize the situation on the money market.
Prior to the April 2014 increase of the discount rate, the bank had raised its overnight loan rate from 7.5% to 14.5% to support the Ukrainian currency. With further hikes of the
discount rate from July 2014 through February 2015, the overnight loan rate shot up to 18.8% and further to 33.0% in March, as inflation hit 34.5% at end-February, 45.8% at
the end of March, and reached 60.9% in April. Decelerating inflation prompted the NBU to cut its key interest rate 3.0 percentage points to 27.0% on 28 August 2015, followed
by a 5.0% cut on 24 September 2015 to 22.0%, which was then followed by a 300-basis-point cut to 19.0% in April 2016 and a further cut to 16.5% in June, 15.5% in July, and
15.0% in September.
2016IHS.
page 11 of 43
MonetaryPolicyIndicators
2013
2014
2015
2016
2017
2018
2019
2020
PolicyInterestRate(%,endofperiod)
6.50
14.00
22.00
13.50
9.00
7.00
5.50
5.50
Short-termInterestRate(%,endofperiod)
7.33
15.17
27.41
19.69
12.35
9.52
6.50
6.50
Long-termInterestRate(%,endofperiod)
16.65
18.66
29.81
28.22
20.38
14.17
9.46
6.25
Fiscalpolicy
Accordingtothe2016budgetplan,thestatebudgetdeficitwillstandat3.7%ofGDP,asin2015and2014,downfrom4.6%in2013. The plan also projects real GDP
will expand 2% in 2016, with inflation averaging 12%. State revenues are expected to rise 15% year on year (y/y), totaling UAH595 billion, compared with UAH668 billion in
expenses. The budget projects the hryvnia will average UAH24.00/USD1.00, and import prices of natural gas will hit USD224.00/thousand cubic meters (Mcm).
TheoverallgeneralgovernmentbudgetwillnotincludethefinancialimbalancesatNaftogazUkrayiny,breakingawayfrompreviouspractices. After years of
incurring extrabudgetary expenses by allocating subsidies to state-run Naftogaz Ukrayiny, the government has dropped this burdensome practice for 2016. Still, uncertainty
about the energy bill remains a concern for public finances. The state budget provided UAH110 billion in subsidies to Naftogaz in 2014, but only UAH32 billion in 2015. This
burden was mitigated by the 201516 temporary winter gas contract between Naftogaz and Gazprom, which set the gas price at around USD230/Mcm, significantly lower
than the USD486/Mcm set by the 2009 contract.
Externalsector
Ukrainescurrent-accountdeficitwillremainmoderatein2016,withthedevaluedhryvniaandfalteringdomesticdemandnarrowingthetradegap. The trade
balance initially suffered in 2014 as exports slackened because of the weak European and Russian outlook and trade disruptions with Russia. However, imports are now
2016IHS.
page 12 of 43
declining even more dramatically than exports, despite falling world-market prices for Ukraines main commodity exports and severe problems on the supply side. The decline
in imports is driven by shrinking domestic demand and an earlier dive in the exchange rate. On the export front, receipts from services also continue to shrink, particularly as
Russia steadily decreases its transit gas shipments through Ukraine, implying reduced transit fees for the Ukrainian government. Thereafter, a much-diminished trade deficit
should prevail until the end of the decade, but exports will have to become relatively more competitive (helped by the currency devaluation) to enable a sustained recovery of
Ukraines economy, although weaker Eurozone domestic demand after the Brexit could undermine this recovery. The current account will be in a mild deficit in 2016 and is
expected to widen in the medium term.
SupportfromtheInternationalMonetaryFund(IMF)remainscrucialforUkrainesexternalliquidityintheshortandmediumterm. Liquidity risks remain extremely
high. The severe political and economic crisis has only increased domestic demand for hard currency, and foreign currency debt-service obligations loom. As long as the new
Ukrainian authorities broadly remain on track with reforms recommended by the IMF, they are expected to receive the USD17.5-billion multiyear credit line until 2019. This will
be supplemented by credits from official and other multilateral lenders that should bring the total rescue package to USD40 billion.
TradeandExternalAccountsIndicators
2013
2014
2015
2016
2017
2018
2019
2020
ExportsofGoods(US$bil.)
59.1
50.6
35.4
32.7
33.4
35.0
38.1
41.4
ImportsofGoods(US$bil.)
81.2
57.7
38.9
40.6
44.1
48.2
52.4
56.8
TradeBalance(US$bil.)
-22.1
-7.1
-3.5
-7.8
-10.6
-13.3
-14.3
-15.4
TradeBalance(%ofGDP)
-12.1
-5.3
-3.8
-8.7
-10.4
-11.4
-10.5
-9.6
CurrentAccountBalance(US$bil.)
-16.5
-4.6
-0.2
-0.5
-0.4
-1.6
-2.1
-3.0
-9.0
-3.4
-0.2
-0.6
-0.4
-1.4
-1.5
-1.9
Keyindicatorsandforecasts
2016IHS.
page 13 of 43
Keyindicatorsandforecasts
DetailedMacro-EconomicIndicators
RealGDP(%change)
2012
2013
2014
2015
2016
2017
2018
2019
2020
0.2
0.0
-6.6
-9.9
0.5
1.3
2.0
3.4
3.5
NominalGDP(US$bil.)
175.8
183.3
133.3
90.5
90.2
102.4
116.6
136.0
159.9
3,879
4,059
2,963
2,019
2,022
2,306
2,639
3,097
3,660
NominalGDPPerCapita(PPP$)
7,621
7,769
7,416
6,783
6,948
7,235
7,585
8,049
8,551
7.4
5.2
-6.2
-15.8
-0.8
2.1
3.1
4.1
4.0
5.0
-8.4
-24.0
-9.3
-0.5
-7.1
1.1
1.6
3.0
4.5
-0.9
1.1
1.0
-2.0
1.1
0.8
1.0
1.1
3.8
-3.5
-22.1
-22.0
-6.2
2.7
5.3
6.3
4.9
-5.6
-8.1
-14.2
-16.9
-6.7
1.8
3.9
5.0
5.7
IndustrialProductionIndex(%change)
-0.7
-4.3
-10.1
-13.0
2.7
3.2
4.0
5.5
4.9
0.6
-0.3
12.2
48.7
12.9
7.0
5.4
4.7
4.5
3.6
-0.1
17.2
35.9
14.8
6.6
5.5
5.1
4.5
7.50
6.50
14.00
22.00
13.50
9.00
7.00
5.50
5.50
Short-termInterestRate(%)
8.28
7.33
15.17
27.41
19.69
12.35
9.52
6.50
6.50
Long-termInterestRate(%)
18.47
16.65
18.66
29.81
28.22
20.38
14.17
9.46
6.25
-3.6
-4.3
-4.5
-3.5
-2.9
-2.0
-1.6
-1.2
-1.2
45.32
45.17
45.00
44.82
44.62
44.41
44.17
43.93
43.68
-0.3
-0.3
-0.4
-0.4
-0.4
-0.5
-0.5
-0.6
-0.6
8.1
7.7
9.7
9.5
9.6
9.1
8.1
7.0
6.8
-14.3
-16.5
-4.6
-0.2
-0.5
-0.4
-1.6
-2.1
-3.0
-8.2
-9.0
-3.4
-0.2
-0.6
-0.4
-1.4
-1.5
-1.9
-21.8
-22.1
-7.1
-3.5
-7.8
-10.6
-13.3
-14.3
-15.4
-12.4
-12.1
-5.3
-3.8
-8.7
-10.4
-11.4
-10.5
-9.6
64.4
59.1
50.6
35.4
32.7
33.4
35.0
38.1
41.4
86.3
81.2
57.7
38.9
40.6
44.1
48.2
52.4
56.8
7.99
7.99
15.77
24.00
25.30
24.05
22.89
21.40
19.76
ExchangeRate(LCU/Yen,endofperiod)
0.09
0.08
0.13
0.20
0.25
0.22
0.21
0.19
0.18
10.55
11.02
19.14
26.13
27.83
26.09
26.21
25.60
24.49
Population(mil.)
Population(%change)
UnemploymentRate(%)
DebtIndicators
ForeignExchangeEarnings(US$bil.)
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
85.5
88.2
83.4
66.7
50.1
48.8
51.0
53.2
57.0
61.1
PortfolioInvestment,Net(US$bil.)
1.7
4.8
8.8
-2.7
0.0
0.0
0.4
1.3
1.4
1.6
PortfolioInvestment,Net(%ofGDP)
1.0
2.7
4.8
-2.0
0.0
0.0
0.4
1.1
1.1
1.0
ForeignDirectInvestment,Net(US$bil.)
7.0
7.2
4.1
0.3
-0.1
-0.2
-0.2
-0.2
-0.2
-0.2
ForeignDirectInvestment,Net(%ofGDP)
4.3
4.1
2.2
0.2
-0.1
-0.2
-0.2
-0.2
-0.1
-0.1
30.4
22.6
18.8
6.6
12.4
13.7
15.8
17.9
19.9
21.8
3.9
2.7
2.3
1.1
3.0
3.4
3.6
3.7
3.9
3.9
126.2
134.6
142.1
126.3
118.7
119.0
121.4
125.1
129.5
134.8
77.4
76.6
77.5
94.7
131.2
131.2
120.1
109.0
96.1
85.1
147.6
152.6
170.4
189.4
237.0
243.7
237.9
235.1
227.3
220.4
ForeignExchangeReserves,Excl.Gold(US$bil.)
ImportCover(Months)
TotalExternalDebt(US$bil.)
TotalExternalDebt(%ofGDP)
TotalExternalDebt(%offorexearnings)
2016IHS.
page 14 of 43
ShortTermExternalDebt(US$bil.)
18.0
17.5
24.3
14.9
10.3
10.6
18.2
18.8
19.4
20.2
ShortTermExternalDebt(%oftotalexternaldebt)
14.3
13.0
17.1
11.8
8.7
8.9
15.0
15.0
15.0
15.0
ShortTermExternalDebt(%ofinternationalreserves)
59.2
77.2
129.7
224.5
83.3
77.5
115.4
104.6
97.6
92.6
TotalExternalDebtService(US$bil.)
29.2
29.8
37.8
17.9
20.4
17.9
16.6
14.1
13.9
12.8
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
59.1
63.3
88.9
52.4
52.2
51.0
60.6
57.1
55.4
52.9
InterestPaymentArrears(US$bil.)
ExternalLiquidityGap(%offorexearnings)
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterly Sovereign Risk forecast bank (
SRS).
DetailedMacro-EconomicIndicators
2008
RealGDP(%change)
2009
2010
2011
2012
2013
2014
2015
2016
2.3
-14.8
4.1
5.5
0.2
0.0
-6.6
-9.9
0.5
NominalGDP(US$bil.)
180.0
117.2
136.0
163.2
175.8
183.3
133.3
90.5
90.2
3,910
2,558
2,980
3,588
3,879
4,059
2,963
2,019
2,022
NominalGDPPerCapita(PPP$)
7,545
6,508
6,886
7,440
7,621
7,769
7,416
6,783
6,948
13.1
-14.9
7.1
11.3
7.4
5.2
-6.2
-15.8
-0.8
-1.2
-50.5
3.9
8.5
5.0
-8.4
-24.0
-9.3
-0.5
1.1
-2.4
4.0
-2.9
4.5
-0.9
1.1
1.0
-2.0
17.0
-38.9
11.3
15.4
3.8
-3.5
-22.1
-22.0
-6.2
5.7
-22.0
3.9
2.7
-5.6
-8.1
-14.2
-16.9
-6.7
IndustrialProductionIndex(%change)
-5.0
-20.6
12.0
8.0
-0.7
-4.3
-10.1
-13.0
2.7
25.2
15.9
9.4
8.0
0.6
-0.3
12.2
48.7
12.9
35.6
6.6
20.9
19.1
3.6
-0.1
17.2
35.9
14.8
12.00
10.25
7.75
7.75
7.50
6.50
14.00
22.00
13.50
Short-termInterestRate(%)
15.23
15.96
10.94
10.57
8.28
7.33
15.17
27.41
19.69
Long-termInterestRate(%)
17.42
21.20
15.83
15.92
18.47
16.65
18.66
29.81
28.22
-1.5
-4.1
-6.0
-1.8
-3.6
-4.3
-4.5
-3.5
-2.9
46.03
45.83
45.65
45.48
45.32
45.17
45.00
44.82
44.62
-0.5
-0.4
-0.4
-0.4
-0.3
-0.3
-0.4
-0.4
-0.4
6.9
9.6
8.8
8.6
8.1
7.7
9.7
9.5
9.6
-12.8
-1.7
-3.0
-10.2
-14.3
-16.5
-4.6
-0.2
-0.5
-7.1
-1.5
-2.2
-6.3
-8.2
-9.0
-3.4
-0.2
-0.6
-17.5
-5.3
-9.6
-18.0
-21.8
-22.1
-7.1
-3.5
-7.8
-9.7
-4.6
-7.1
-11.1
-12.4
-12.1
-5.3
-3.8
-8.7
63.2
37.1
47.3
62.4
64.4
59.1
50.6
35.4
32.7
80.6
42.5
56.9
80.4
86.3
81.2
57.7
38.9
40.6
7.70
7.98
7.96
7.99
7.99
7.99
15.77
24.00
25.30
ExchangeRate(LCU/Yen,endofperiod)
0.08
0.09
0.10
0.10
0.09
0.08
0.13
0.20
0.25
10.72
11.50
10.64
10.34
10.55
11.02
19.14
26.13
27.83
Population(mil.)
Population(%change)
UnemploymentRate(%)
DebtIndicators
2016IHS.
2008
2009
2010
2011
2012
2013
2014
2015
2016
page 15 of 43
ForeignExchangeEarnings(US$bil.)
84.6
53.7
67.2
85.5
88.2
83.4
66.7
50.1
48.8
PortfolioInvestment,Net(US$bil.)
-1.3
-1.5
4.4
1.7
4.8
8.8
-2.7
0.0
0.0
PortfolioInvestment,Net(%ofGDP)
-0.7
-1.3
3.2
1.0
2.7
4.8
-2.0
0.0
0.0
ForeignDirectInvestment,Net(US$bil.)
9.9
4.7
5.8
7.0
7.2
4.1
0.3
-0.1
-0.2
ForeignDirectInvestment,Net(%ofGDP)
5.5
4.0
4.2
4.3
4.1
2.2
0.2
-0.1
-0.2
30.8
25.5
33.3
30.4
22.6
18.8
6.6
12.4
13.7
3.8
5.7
5.7
3.9
2.7
2.3
1.1
3.0
3.4
101.7
103.4
117.3
126.2
134.6
142.1
126.3
118.7
119.0
56.5
88.2
86.3
77.4
76.6
77.5
94.7
131.2
131.2
120.1
192.5
174.7
147.6
152.6
170.4
189.4
237.0
243.7
ShortTermExternalDebt(US$bil.)
17.5
9.8
12.9
18.0
17.5
24.3
14.9
10.3
10.6
ShortTermExternalDebt(%oftotalexternaldebt)
17.2
9.5
11.0
14.3
13.0
17.1
11.8
8.7
8.9
ShortTermExternalDebt(%ofinternationalreserves)
56.7
38.5
38.8
59.2
77.2
129.7
224.5
83.3
77.5
TotalExternalDebtService(US$bil.)
17.6
22.5
27.2
29.2
29.8
37.8
17.9
20.4
17.9
0.3
0.7
1.7
0.0
0.1
0.1
0.0
0.0
0.0
48.7
51.9
51.6
59.1
63.3
88.9
52.4
52.2
51.0
ForeignExchangeReserves,Excl.Gold(US$bil.)
ImportCover(Months)
TotalExternalDebt(US$bil.)
TotalExternalDebt(%ofGDP)
TotalExternalDebt(%offorexearnings)
InterestPaymentArrears(US$bil.)
ExternalLiquidityGap(%offorexearnings)
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight.
MonthlyForecastUpdateTables
DetailedQuarterlyForecastTables
Businessenvironment:Legal:Countryriskstatement
Ukraine's legal system is currently being reformed in order to achieve court independence, with the entire judicial corps being overhauled since October 2015. However, the
legal environment remains difficult to navigate, and weaknesses remain. Conditions attached to IMF funds, approved in March 2015, and the implementation of an Association
Agreement with the EU will lead to further changes to the legal system. The current anti-corruption drive of the reformist government is aimed at removing corrupt officials and
practices from the legal system as well, but the anti-corruption reform proceeds slower than initially anticipated both by Western sponsors and the Ukrainian public.
Contractalterationthreats
Ukraine's ongoing armed conflict in the Donetsk and Luhansk regions since May 2014, combined with the economic crisis, has substantially increased budgetary pressures at
all levels, from the central government in Kiev to local budgets.
Immediate non-payment risks have been reduced by the IMF's approval of a USD17.5-billion extended fund facility on 11 March 2015 and its immediate disbursement of
USD5 billion by the IMF. The entire rescue package envisioned by the IMF at the head of a consortium of multilateral financial institutions and leading Western governments
would be valued at USD40 billion. In return, Ukraine pledged to tackle some of the most serious fiscal and economic issues facing the country, including a heavy fiscal burden
of subsidies to be replaced by more targeted assistance and reform of the pension system. Due to extreme budgetary pressures, the level of state contract alteration risk
remains high, with many projects at risk of delay, review, or outright cancellation.
State contract revision risks are severe in the three-year outlook due to legislative loopholes, and the active participation of politicians in asset redistribution. Both central and
local authorities are likely to use the threat of legal prosecution or outright expropriation when seeking concessions from investors, such as changing royalties or maturities on
the contracts. Due to ambiguous domestic legislation and lack of independence of the courts, successful enforcement of international arbitration awards is likely to depend on
a close relationship with key government decision makers.
Revision risks remain particularly high for any contracts concluded under the Party of Regions (PoR)-led government that collapsed in February 2014, as the former
opposition is now in power and was able to consolidate its position in the current government. This applies particularly to contracts concluded with businessmen closely
associated with the PoR and President Viktor Yanukovych, including Yanukovych's son Oleksandr (MAKO Corporation, active in construction, real estate and finance), and to
contracts with Russian companies, especially in energy and military engineering. Revision risks are severe for the areas of the Donetsk and Luhansk regions that are not
controlled by the central government in Kiev and are governed by the separatist self-proclaimed breakaway "people's republics". Central and regional governments are highly
likely to cancel projects in the separatist controlled areas, while the separatists themselves are highly unlikely to recognise any contracts authorised by Kiev. Contracts signed
by Ukrainian government authorities in Crimea are also cancelled, as the region is currently administered by Russia. Contracts between the Russian authorities in Crimea and
private contractors will be considered as void by the Ukrainian government in Kiev and would be subject to prohibitive Western sanctions.
2016IHS.
page 16 of 43
Contractenforcement
Although judicial independence exists in principle, in practice the legal system is known to be influenced by political powers. Judges are often subjected to pressure by
political and business interests. Ukraine's court system, inherited from the Soviet Union in 1991, is widely regarded as corrupt. Additionally, prosecutors in Ukraine have
greater powers than in most other countries in Europe.
Ukraine has fewer relevant corporate and property laws compared to the EU member states; this hinders corporate governance. Ukrainian companies often use international
law to settle conflicts through arbitration in third countries. Ukraine recognises the verdicts of the European Court of Human Rights. Legal reforms approved by the previous
cabinet of Arseniy Yatsenyuk in October 2015 would require the dismissal of up to 9,000 judges or the entire judicial staff. The reforms, which are still expected to be
implemented by the Groisman cabinet, include formation of a three-tier court system (first degree, appeals, high) and a single collegiate body responsible for selection of the
judges. They intend to eliminate political interference into court operations and improve their transparency and professionalism, similar to the ongoing police reforms. In
particular, the government is keen to attract younger judges into the judicial corps and remove many older judges who were trained in the Soviet era.
In the one-year outlook the reform is likely to disrupt the normal operation of Ukrainian courts as the current judges will be dismissed, probably in stages and region by region,
and will need to apply for reappointment, temporarily restricting the legal recourse available for commercial disputes. Given the current government's declared determination
to reform the court system and the popularity of these reforms, however, dispute hearings are likely to be delayed rather than denied. Moreover, disruption to courts hearing
disputes involving large, foreign firms is likely to be minimised as the Ukrainian government seeks to protect the foreign direct investment it badly needs to counteract the
ongoing economic deterioration in the country.
Expropriationrisks
The close links between business and politics in Ukraine create a heightened risk of expropriation during times of political transition. Successive governments in Ukraine have
sought to expropriate and then reprivatise assets controlled by their opponents' financial supporters. The active participation of the state and politicians in property and asset
redistribution makes expropriation risks high. The Party of Regions (PoR) government that was ousted in February 2014 had sought to expropriate and then reprivatise assets
controlled by its opponents' financial supporters as well as independent oligarchs. Several assets were taken over, in rigged or not fully competitive auctions, by businessmen
closely associated with the PoR and former president Viktor Yanukovych, including Yanukovych's son Oleksandr (MAKO Corporation), and PoR faction leaders Rinat
Akhmetov (System Capital Management) and Serhiy Tyhypko (TAS Group). Following the February 2014 fall of the PoR government and former president Yanukovych, there
are major and immediate expropriation risks to these businessmen's assets. Expropriation risks are elevated across all sectors for foreign investors that neglect their assets or
run them inefficiently. Otherwise, foreign-owned assets are unlikely to be targeted for expropriation, as the government relies on foreign funding from the IMF and Western
donors.
In addition to Yanukovych-associated assets, Russian-owned assets are at high risk of expropriation following Russia's annexation of Ukraine's Crimea region in March 2014
and due to continued Russian support to separatist militants in the east of Ukraine. On 2 June 2014, the Ministry of Justice proposed to seize and expropriate Russian
government assets and property in the country, but this initiative was not approved by the government. In Crimea itself, Russia has seized the regionally based oil and gas
producer Chernomorneftegaz and numerous other businesses as a result of its annexation of the region. Krymenergo, a regional utility owned by Rinat Akhmetov was seized
by Russian authorities of Crimea in January 2015. Total value of expropriated Ukrainian assets in Crimea exceeded USD1 billion. Ukraine does not recognise the annexation
and the government and individual companies and banks are started international arbitration in 2015 against Russia to seek compensation for seized assets in Crimea.
Assets located within the control of the self-proclaimed separatist republics in Donetsk and Luhansk regions in the east are at elevated risk of seizure by the separatist
authorities. Assets at particularly high risk are those belonging to businessmen supporting the Ukrainian government and businesses that refuse to pay tax or other duties to
the separatist entities. For instance, in June 2016 Donetsk separatists banned entry to territories under their control to Akhmetov, who owns assets in Donetsk and nearby
districts.
Keyindicators-regulationandcontracts
Doingbusinessindicators
2014
OECDavg.
4.7
NA
Import
28.0
9.6
Export
29.0
10.5
378.0
539.5
30.0
31.5
21.0
9.2
6.0
4.8
27.0
9.6
Average time to clear customs* (days)

Trade facilitation, lead time (days)
Enforce a contract
Time required (days)
Number of procedures
Start a business
Registration of property
2016IHS.
page 17 of 43
7.0
4.7
2.9
1.7
Corporate
25.0
NA
Individual
15.0
NA
350.0
175.4
5.0
11.8
Time to resolve insolvency (years)

Taxationindicators
Highest marginal tax rate** (percent)
Time to prepare and pay taxes (hours)

Tax payments, number
* Latest available: 2005
** Latest available: 2009
Source: World Bank
Tax:Countryriskstatement
The parliament approved new changes to the tax regime in December 2015 under the IMF-mandated reforms tied to a USD17.5-billion four-year Extended Funding
Arrangement, This included tax increases and the simplification of the number of taxes from eight to five. In general, the Ukrainian tax system is effective when it comes to
major corporations, and the country's tax code is generally coherent and straightforward, with tax revenues accounting for approximately 20% of GDP. However, this
effectiveness is reduced when it comes to small and medium-sized enterprises, with the latter often expressing concerns about being overtaxed.
Taxationrisks
In December 2015 the Verkhovna Rada, Ukrainian parliament, approved changes into the tax system. The new tax code became effective on 1 April 2016, but the new tax
rates had come into effect from 1 January. The tax reform was based on the compromise between the Ministry of Finance and the members of parliament, and was welcomed
by the International Monetary Fund (IMF), which had approved a USD17.5-billion extended fund facility in March 2015 to finance Ukraine's immediate budgetary requirements.
The tax reform reduced the tax burden and simplified the system. Most taxes were set on flat rates, corporate income tax rate remained stable at 18%, VAT at 20%, and the
employer's social contribution was decreased from 41% to 22%. The changes are aimed at incentivising companies and individuals to avoid tax evasion, moving them from
the informal sector into the formal, taxed economy and by broadening the tax base. According to a report published by the Ministry for the Economy in February 2016, 40% of
the economy of Ukraine functioned in the informal sector as of September 2015. The December 2015 tax changes also significantly increased excise rates for spirits (by 50%)
, beer and wine (by 100%), tobacco (by 40%) and fuel (by 13%).
The tax reform is likely to be continued in 2016. In March 2016 Roman Nasirov, head of the State Fiscal Service, said that further changes in the tax system are likely to be
introduced later in the year. The country's tax prospects are very much intertwined with its precarious economic and political situation. Should Ukraine suffer a banking
collapse or another significant depreciation of the hryvnia, then it is likely that the tax system will need to be revised completely. Additionally, the appointment of the new
Finance Minister in April 2016, who replaced the previous minister, reform-minded Natalie Jaresko, can have an effect on the tax reform. In the meantime, the imposition of
ad-hoc taxes as a means of covering budget shortfalls can be expected as it was the case with mining royalties in 2014.
Ukraine was ranked 107th in the Paying Taxes 2016 study of 189 economies by the World Bank. Total tax rate (TTR) for a model enterprise in Ukraine is currently 52.2%.
TTR for an average country in 2015 was 40.8% and the average for Central Asia and Eastern Europe region was 35.2%.
Operational:Countryriskstatement
The business environment has suffered from the political instability brought by Russia's annexation of Crimea in 2014 and the unresolved conflict in the east. While the current
government is attempting to push through key structural reforms to improve the governance and return the economy to growth, re-escalation of fighting remains a risk.
Economic weaknesses in Ukraine are likely to increase labour unrest in 2017. Cargo movement across border to Russia is restricted. Although the government is keen on
attracting FDI, insufficient progress in the anti-corruption drive is mitigating these efforts.
Labourrelationsrisks
In the last two and a half years the Ukrainian economy has experienced a protracted crisis, with contracting output, rising inflation and unemployment, and a fall in real
incomes; the government had to adopt an austerity budget. Economically driven protests are likely to affect industries where the government has either reduced subsidies or
tax rebates, or in the public sector, where government spending will remain below the needs.
Ukrainian farmers are dissatisfied with the government's decision to remove a tax rebate for small and medium-sized enterprises in December 2015. The farmers held
numerous protests across Ukraine, including protest rallies in Kiev and the regional centres across the country, and blocked key roads, including those leading to main export
ports and to the border crossings with the EU, using tractors and other agricultural machinery for up to 12 hours per day, disrupting ground cargo. Similar protests are likely in
the one year outlook.
2016IHS.
page 18 of 43
Another dissatisfied group prone to economically driven protests are coal miners from both eastern (Donetsk, Luhansk and Dniepropetrovsk regions) and western Ukraine (
Lviv and Volyn regions). As the coal mines lost government subsidies, wage arrears in the industry are common. Miners are most likely to protest by holding rallies in Kiev,
Lviv, Dniepropetrovsk and their local towns, as well as by blocking key roads. Miners in western Ukraine use the tactic of blocking key highways from Ukraine to Poland near
the border crossings, significantly disrupting traffic and resulting in cargo delays.
Strike action has tended to be ineffective due to weakness of unions, but would increase in the event of an economic crisis. The strength and influence of trade unions in
Ukraine has declined as they have come to serve the interests of whichever political faction they are patronised by, rather than the interests of the workers themselves.
Therefore, the membership of unions is often a mere formality and activism is low. The strikes tend to be short, lasting less than a week, and related to specific localised
grievances such as unpaid wages or other disputes with management. That said, the prospect of further economic and budget difficulties in Ukraine, accompanied by high
inflation and falling real incomes, will increase the risk of strike action across all sectors, but particularly in the public sector, especially in education, healthcare and public
transport.
Corruptionrisks
Corruption is prevalent at all levels of the Ukrainian political system and bureaucracy, including the security forces, law enforcement agencies, and economic agencies (such
as the tax office). The administration of former president Viktor Yanukovych enacted legislation designed to tackle corruption by tightening existing laws and exacting more
severe punishments. However, in practice those laws did not to significantly curtail corruption except affect the margins of the more transparent government institutions, such
as the Central Bank, and some senior cabinet officials. Corruption at customs in the form of bribe solicitation by officers leads to cargo delays, as corrupt officials have been
known to hold or impede shipments for weeks under the pretext of incomplete paperwork. The problem was especially evident in the form of favouritism by political factions
towards their business backers. The extent of corruption under the Yanukovych administration was revealed after his government was overturned, when documents
suggestive of corrupt practices were found at his official residence.
In order to tackle corruption, in September 2014, the Ukrainian parliament adopted a law "on purification of the authorities". The vetting legislation aims to exclude from public
office those civil servants who worker under Yanukovych. The law was seen as a crucial piece of legislation in addressing corruption in Ukraine, both from the perspective of
Western donors and the Ukrainian public. According to an October 2014 poll, 63.8% of Ukrainians supported the vetting law. A total of 860 state officials have been dismissed
in Ukraine in 2015; further 2,557 former officials were banned from public-sector employment for 10 years. Elected officials or current senior judges were not subject to the
vetting process but amendments in June 2016 removed their absolute immunity. The timely and effective implementation of the vetting law is likely to improve governance in
Ukraine by removing at least some corrupt officials and thereby reducing the overall level of corruption.
Another element of the government's anti-corruption tactics are highly publicised anti-corruption investigations against previous or current officials. In October 2015, the
government announced plans for a comprehensive court system reform which may lead to the dismissal of over 9,000 judges whose reappointment will be held via an open
competition; the reform's likely aim would be to remove at least the most corrupt individuals. However, Ukraine's limited effort in investigating bribery and corruption
allegations, including at the highest level, worsens corruption outlook. In particularly, the prosecutor's office failed to investigate allegations against President Petro
Poroshenko and former PM Arseniy Yatsenyuk.
Security:Warrisks:Snapshot
The February 2015 ceasefire agreement has proven unable to prevent continued fighting between the pro-Russian separatists and the government forces in Donetsk and
Luhansk regions. A ceasefire collapse would lead to renewed heavy fighting in the east.
Overview
. Russia occupied Crimea in February 2014 and annexed it in March 2014; any Ukrainian attempts to recapture the peninsula militarily would trigger an open inter-state
military conflict, therefore such scenario is unlikely. The armed conflict in eastern Ukraine is still ongoing along a geographically stable line of contact due to Russias
continued support to the separatist militants in Donetsk and Luhansk regions. Although fighting along the mostly stable line of contact is likely to continue with nearly daily
incidents, the likelihood of open and direct Russian involvement in Donbass remains low , as it would trigger further Western sanctions against Russia.
Interstatewar
Russia's aims in Ukraine can be summarised as follows: ensuring that Ukraine does not join NATO and that any negotiations on EU integration include Russia; weakening
and undermining the current Kiev government; and sustaining Russian influence through continued regional divisions of the country.
Rather than pursue direct open invasion to achieve its goals, Russia's strategy has been to provide covert material support to the separatists to ensure that they would not be
defeated, while pushing for a political solution on Moscow's terms. This support was indicated most strongly during the separatist offensives in August-September 2014 and in
January-February 2015, when the militants launched several counter-attacks utilising large quantities of heavy military equipment, including main battle tanks and artillery.
Much of this equipment is likely to have been provided by Russia. Ukrainian and NATO officials have also claimed Russian troops entered the country in support of the
separatists, but that many have since been withdrawn. A May 2015 report published by the Russian opposition activists claims that Russia both recruited and paid for military
personnel to be deployed in eastern Ukraine.
2016IHS.
page 19 of 43
Despite the Minsk II ceasefire agreement, which came into force on 15 February 2015, fighting between Ukrainian and separatist forces continued in many locations along the
stable contact line. The prospect of further Western sanctions on the Russian economy probably acts as a deterrent to the Kremlin. Nevertheless, the risk remains of more
direct support for the separatists, which could take the form of airstrikes or artillery shelling of government positions from Mariupol in the south to Donetsk in the north and
Luhansk in the east. There are reports of continued presence of Russian troops next to the Ukrainian border as well as of use of "humanitarian convoys" to transport
ammunitions from Russia into eastern Ukraine.
The likelihood of military conflict between Russia and Ukraine over Crimea, the Ukrainian peninsula and autonomous region annexed by Russia in March 2014, is low, at least
for as long as the conflict in the east remains unresolved. Russia has a substantial military presence in the Crimea. This has been further strengthened since the annexation,
most likely with the aim of dissuading Ukraine from seeking to re-take the region: RUSI estimates Russian troops there at 28,000, including 13,000 in the Black Sea Fleet.
Given the Ukrainian inability to defeat the Russian-supported separatists in the east militarily, an attempt to re-take Crimea is unlikely. However, the Crimea blackout in
November 2015 increased the risks of Russia's retaliatory military incursion into the Kherson region on the mainland.
Civilwar
Since the Minsk II ceasefire agreement came into force on 15 February 2015, there has been a geographic stabilisation in fighting in eastern Ukraine, especially after the
separatist militants took over Debaltseve, a key rail and road hub, on 19 February 2015 and the line of contact stabilised in its current location. While initially most of the
fighting had involved light guns, grenade launchers, and mortars, since June 2015 use of battle tanks and heavy artillery has become widespread. In September 2015 there
was another decrease in fighting, followed by a renewed re-escalation since May 2016.
The Ukrainian parliament approved a set of laws on 17 March 2015 to introduce special rules on local self-governance for certain areas of the Donetsk and Luhansk regions.
Initially approved in October 2014, the legislation was not applied in practice, as the geographical area of its implementation was not defined. The new laws in principle lay the
groundwork for a more durable stabilisation of eastern Ukraine, but several aspects make them unlikely to be acceptable to the separatists. First, the approved boundary
gives special rights to the areas held by separatist militants as of September 2014 (when the first ceasefire was reached) and excludes certain key locations since taken over
by the separatists, such as Donetsk airport and Debaltseve. Secondly, special status will be granted only once new local elections are held in the designated territories, in
accordance with Ukrainian laws and the democratic standards of the OSCE. Separatists repeatedly stated they perceive it as Kiev intentionally setting unreasonable
conditions. Achieving further de-escalation in eastern Ukraine is therefore likely to require continued negotiations and concessions from all parties, with the risk of renewed
fighting remaining. August 2016 reports have pointed to the significant build-up of separatist forces near Mariupol, Donetsk and Horlivka.
Since May 2014 the conflict has involved the widespread use of heavy weaponry, including self-propelled artillery and multiple-launch rocket systems. Shelling has often been
indiscriminate and imprecise, and has caused extensive damage to transport infrastructure, including the destruction of sections of highways, railroads and landing strips,
collateral damage to nearby industrial assets, and office buildings. There has been substantial destruction to residential dwellings and numerous civilian casualties. According
to UN estimates in September 2016, the conflict in eastern Ukraine caused 9,640 deaths and over 22,400 injured. As of August 2016, there were over 1.7 million internally
displaced by the conflict. According to the Ukrainian's government estimate in May 2015, the material damage caused by the conflict exceeded USD350 billion.
Terrorismrisks:Snapshot
Pro-Russian armed separatist groups are likely to attack government buildings in the east and south, including outside of Donetsk and Luhansk regions. There is a risk of
attack against Russian-owned assets, including commercial, by ultranationalist armed groups.
Overview
The continuing armed conflict in eastern Ukraine provides manpower and material for terrorist activity outside the conflict zone. IED attacks against government buildings,
police offices or poorly secured railway infrastructure are most likely in Kiev and in the Russian-speaking large cities in the south and east, such as Odessa and Kharkiv. As
the majority of terrorist attacks are intended to cause damage to property, risks of injury and death from terrorist attacks are mostly collateral. Risks of cyber-attacks, including
against critical national infrastructure, and mostly executed by cyber groups from Russia, are also currently elevated.
Hotspotsandtargets
The conflict between government forces and separatist militants in the eastern Donetsk and Luhansk regions has been accompanied by an increase in violent attacks outside
the conflict zone, involving primarily crude IEDs and grenades. Targets have included government checkpoints, locations used for fundraising for pro-government forces,
assets associated with government-supporting businessmen, and railway assets and infrastructure. Such attacks are most likely in the cities and regions of Kharkiv and
Odessa, but are also probable in other Russian-speaking cities in the east and south of the country as well as in the capital city of Kiev. The majority of previous attacks have
appeared intended to cause property damage rather than injury, but a 22 February 2015 IED explosion at a peaceful pro-government rally in Kharkiv that killed four and
injured 11 indicates that there are attendant death and injury risks.
Terrorism risks would increase in the event of a lasting stabilisation in the east. Both sides involve large militia forces, many of which only operate under loose central
command. Demobilising such groups would be difficult. On the separatist side, fighters who assessed they were being sidelined within new regional command structures
would be likely to resort to targeted attacks against rival groups or assets, or more criminal behaviour as they sought to take advantage of a leadership vacuum and establish
spheres of influence. Assets particularly at risk of physical attack and seizures would be those belonging to or associated with government-friendly businessmen and
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businesses that refused to pay tax to the self-proclaimed separatist "people's republics". Any attempts by the separatists to seize assets of unsupportive businessmen are
likely to be carried out by armed groups of militants, raising risks of property damage and injury to employees.
On the pro-government side, the various paramilitary forces would be likely to oppose any negotiated settlement giving autonomy to Donetsk and Luhansk, as indicated by a
violent protest in Kiev on 31 August 2015. They would probably seek to challenge this through attacks against targets within separatist controlled territory or assets perceived
to represent Russian interests, including diplomatic missions, banks, offices and oil and gas pipelines. On 17 June 2014, an explosion, most likely a terrorist attack, damaged
the Urengoi-Pomary-Uzhhorod pipeline in Poltava region, central Ukraine. Violent attacks on Russian commercial banks in cities across Ukraine in 2016 indicate the risk to
privately owned commercial assets associated with Russia.
Politicians, journalists, and public figures from both the Ukrainian nationalist side and pro-Russian side are at risk of assassination attempts and targeted attacks. Executed
attacks have involved beatings, stabbings, gunfire and explosives, such as IED attack that killed journalist Pavel Sheremet on 20 July 2016.
Socialstabilityandunrestrisks:Snapshot
Russian-owned assets are at risk of damage due to Russia's support to separatists. Anti-government demonstrations are likely in Kiev as the economy struggles, as well as in
eastern and southern cities, including Dnipro, Kharkiv and Odessa.
Overview
Public willingness to protest has been fomented by the government's liberal approach, political pluralism across all levels, and the freedom of media; it was also aggravated by
the economic crisis and continued government instability. This provides an environment in which protests, both economically and politically driven, are likely to be frequent
and widespread across the country, but will unlikely be sufficient to mobilise a large-scale protest movement able to topple the government as it did in February 2014.
However, protesters will increasingly likely attempt to block roads to increase impact of their actions.
Protestsandriots
The conditions are present for renewed anti-government protests in central Kiev, around Independence Square (Maidan), if the new Groisman government does not
implement the wide-ranging economic and political reforms expected by the population. According to a 12 January 2016 poll by KMIS, 54.8% of Ukrainians were willing to
take part in new protests. Additionally, the current government is tolerant towards protests, allowing any type of rallies or marches as long as they are non-violent. According
to a 4 October 2016 poll, only 9.8% of Ukrainians approve of the policies of President Petro Poroshenko (down from 20.4% in July). The likelihood of a renewed protest
movement in Kiev will increase if the government fails to achieve a lasting settlement in the conflict in the eastern Donetsk and Luhansk regions, and the economic impact it is
having on an already weakened economy, or if there are perceived to be excessive delays in the full implementation of the anti-corruption or lustration laws.
Ultranationalist groups are also likely to stage regular protests near government buildings and Russian assets in Kiev against government policy and Russian support for
separatists in eastern Ukraine. Vandalism and violence is very likely in connection with such protests, with turnout in the low thousands at most. On 3 July 2015, an estimated
2,000 nationalists marched through Kiev demanding the government to officially recognise the war in the east. Violent protests outside the parliament on 31 August 2015
caused three deaths and over 120 injuries.
Fighting between pro-Russian activists and Ukrainian radical nationalists is very likely, posing death and injury risks in the vicinity of demonstrations. These risks are
particularly high in instances of fighting between largely self-mobilised groups of activists in multi-ethnic cities such as Odessa, Kharkiv, and Kiev, where pro-Russian
separatists have been unable to take or hold control. There is anecdotal evidence that pro-Russian groups have been established with the aim of provoking protests in such
cities; the Ukrainian Security Service reported several arrests of pro-Russian individuals and seizures of firearms and explosives in early July 2015. Activists from both sides
are likely to have access to firearms, live ammunition, Molotov cocktails, improvised explosive devices and blunt weapons. The most deadly example of fighting so far
occurred in Odessa on 2 May 2014, when at least 48 people died, 42 of them pro-Russian activists who were in a building that caught fire.
Russian-owned assets are at risk of damage from vigilante vandalism due to Russia's annexation of Crimea, irrespective of whether the assets are owned privately or publicly.
This includes industrial facilities, infrastructure, banks (as manifested in February 2016) and office buildings.
Overview
The continued fighting between the security forces and the separatists in Donbass entails high death and injury risks for civilians in Donetsk and Luhansk regions. As terrorist
activity mostly target properties, risk of death or injury from IED attacks remains mostly collateral. Nationalist protests, marches and rallies carry elevated risks of death and
injury, especially in cities in the south and east. Kidnap and ransom risks are elevated in areas close to the conflict zone in Donbass, and high in the separatist-controlled
areas and in the Russian-occupied Crimea.
Deathandinjury
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The Minsk II ceasefire agreed between the government, pro-Russian separatists, and Russia signed in February 2015has reduced overall violence in the eastern Donetsk and
Luhansk regions. While the fighting, mostly with mortars and light guns, still continues along the stable line of contact, it is now concentrated in several locations, in particular,
east of Mariupol and near Donetsk. This has reduced the number of casualties, as well as collateral damage to infrastructure and property. As of September 2016, the total
death toll of the fighting in the east is estimated to have reached 9,640, including government forces, militants and civilians; over 22,400 people have been injured.
The risk of renewed large-scale protests and violence in Kiev similar to the November 2013 - February 2014 anti-government demonstrations would increase if the
government and president, Petro Poroshenko, are perceived to offer too generous concessions to the separatists and Russia or to have been defeated in eastern Ukraine.
Such protests would be led by radical nationalist Ukrainian groups, including the Right Sector, and could easily descend into a forceful and violent attempt to overthrow the
government. Pro- and anti-government demonstrations across the country carry a high risk of street violence. Radical groups of pro-Russian activists and Ukrainian
nationalists are likely to engage in fighting, armed with rocks, bottles, blunt weapons, Molotov cocktails and firearms. The most extreme example so far occurred in Odessa on
2 May 2014, when at least 48 people died in fighting between pro-Ukrainian football supporters and activists from Right Sector on the one hand and pro-Russian activists on
the other. Violent protests in Kiev outside the parliament on 30 August 2015 caused three deaths and left over 120 injured.
Any peaceful resolution of the conflict in Donetsk and Luhansk regions is likely to be accompanied by a diversification of security threats. Both sides involve large militia forces
, many of which only operate under loose central command. Both separatist and pro-government fighters would be likely to resist demobilisation and continue to engage in
targeted attacks against assets associated with the other side as well as organised crime.
Non-white individuals, domestic journalists, and LGBT individuals are particularly at risk of physical assault. Risks to journalists were highlighted by the apparent assassination
of a prominent journalist and editor Pavel Sheremet on 20 July 2016 in central Kiev by an IED attached to a car he was driving. Such attacks are often underreported.
Individuals of African and Asian descent are the most likely targets of attack and are less likely to be assisted by police. Risks are highest in the suburbs of major cities,
including Kiev, Odessa, Lviv, Kharkiv, and Dnipro (formerly Dniepropetrovsk).
Keyfactsanddemographics
Area:
603,500 sq km
Population:
42,539,000 (Monthly official estimate, 1 April 2016)
Language:
The official state language is Ukrainian. Russian and other

minority languages have rights guaranteed in legislation,
constitution and by the Council of Europe.
Religion:
Orthodox and (Byzantine-rite) Uniate Catholic
Time Zone:
GMT +2
Neighbours
Russian Federation, Poland, Belarus, Moldova, Romania,
Slovakia, Hungary
Capital City
Kiev (Kyiv)
:
Primary
Odessa (Odesa)
Port:
Primary
Kiev Boryspol (Borispil) International
Airport:
Currency
Hryvnia (UAH)
Politicalsystemandplayers
Partiesandkeyfigures
Majorparties
The Ukrainian parliament (Verkhovna Rada) is composed of 450 deputies, presided over by a chairman. In the October 2014 election, eight parties passed the 5% electoral
threshold. Currently, the governing coalition comprises the largest party in parliament Petro Poroshenko Bloc "Solidarity" (Blok Petra Poroshenka "Solydarnist"), of current
president Petro Poroshenko and the second largest People's Front (Narodnyi Front; NF), of former prime minister Arseniy Yatsenyuk. The current coalition controls 230
seats out of the total 450. The Poroshenko Bloc is traditionally a liberal party which officially criticises populism and calls for pragmatism in policy-making. However, there are
indications that the party lacks ideological unity, as it was primarily created to target the 2014 general election. The NF draws many of its members and supporters from the
Fatherland party, including Yatsenyuk himself. The party has in the past proved to be nationalistic and populist. The coalition, which comprised five parties when it was first
agreed in 2014 (but lost the support of junior coalition partners in September 2015 and then in February 2016), is largely pro-reform, pro-EU and pro-NATO. The coalition also
tables the peaceful resolution of the armed conflict in eastern Ukraine and the return of Crimea under Ukrainian control as another major priority.
PetroPoroshenkoBloc
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Petro Poroshenko Bloc "Solidarity" (Blok Petra Poroshenka "Solydarnist") was initially formed in 2001 but reformatted in the current form in August 2014. The party won 132
seats in the 2014 parliamentary election, more than any other party. In August 2015 it was joined by Kiev Mayor Vitaliy Klitschko's Ukrainian Democratic Alliance for Reform (
Udar) Party. The party advocates pragmatism and realism and is generally pro-Western. However the party is not uniform and includes individuals with very different interests,
involvement in politics and plans. Hence the party's MPs tend not to vote alike.
People'sFront
People's Front (Narodnyi Front; NF) was founded by Arseniy Yatsenyuk and Oleksandr Turchynov in March 2014. The party won 82 seats in the 2014 parliamentary election.
Compared to the BPP it falls along the more nationalist and populist spectrum of the Ukrainian politics. Due to the lack of support to Yatsenyuk, PM in February 2014 - April
2016, the party lost much of its original grassroots support.
Batkivshchyna
All-Ukrainian Union Fatherland (Vseukrayins'ke Obyednannya Bat'kivshchyna; Batkivshchyna) was initially founded in 1995 and is currently led by former prime minister Yulia
Tymoshenko. The party won 82 seats in the 2014 parliamentary election. It was part of the ruling coalition in November 2014 February 2016 but left over irreconcilable
differences. The official manifesto claims that the party aims to build Ukraine as a national and democratic state based on Christian values. The party is known for its more
populist appeal aimed at receiving popular support.
Self-Reliance
Union Self-Reliance (Obyednannya Samopomich) was founded in December 2012 by Lviv mayor Andriy Sadovyi and identifies with the ideology of "Christian morality and
common sense". The party won 33 seats in the 2014 election. It was part of the ruling coalition in November 2014 February 2016.
OppositionBloc
Opposition Bloc (Oppozitsiynyi Blok) was founded in 2014 as six parties that did not endorse the Euromaidan uprising of November 2013 February 2014, merged. The bulk
of the political support came from the Party of Regions (PoR) of former president Viktor Yanukovych: it was the biggest party in the previous 2012 parliamentary election. In
the 2014 election it won 29 seats. Most of its support comes from the Russian-speaking areas in eastern and southern Ukraine, mostly in the cities.
Leadership
Title
Name
Appointed
President
Petro POROSHENKO
7 Jun 2014
Prime Minister
Volodymyr GROYSMAN
10 Apr 2016
Vice Prime Minister for Reforms Implementation
Dmytro SHYMKIV
1 Sep 2015
Vice Prime Minister for Regional Development, Housing, Construction and Utilities
Hennadiy ZUBKO
2 Dec 2014
Vice Prime Minister for European Integration
Ivanna KLYMPUSH-TSYNTSADZE
1 Sep 2015
Vice Prime Minister for Social Policy
Pavlo ROZENKO
2 Dec 2014
First Vice Prime Minister; Minister of Trade and Economic Development
Stepan KUBIV
3 Feb 2016
Vice Prime Minister for Emergencies, Technogenic Disasters and Industrial Development
Volodymyr KISTION
1 Sep 2015
Vice Prime Minister for Humanitarian Issues
Vyacheslav KYRYLENKO
2 Dec 2014
Minister of Finance
Olexandr DANYLYUK
14 Apr 2016
Minister of Foreign Affairs
Pavlo KLIMKIN
19 Jun 2014
Minister of Defence
Col.-Gen. Stepan POLTORAK
14 Oct 2014
Minister of Justice
Pavlo PETRENKO
27 Feb 2014
Minister of Internal Affairs
Arsen AVAKOV
21 Feb 2014
Minister of Energy and Coal Industry
Ihor Nasalyk
2 Dec 2014
Minister of Health
Ulana SUPRUN
27 Jul 2016
Minister of Education and Science
Liliya HRYNEVYCH
14 Apr 2016
Minister of Agrarian Policy and Food
Taras KUTOVY
14 Apr 2016
Minister of Infrastructure
Volodymyr OMELYAN
14 Apr 2016
Minister of Social Policy
Andriy REVA
14 Apr 2016
2016 IHS
Keyfigures
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PresidentPetroPoroshenko
Ukrainian oligarch Petro Poroshenko won 54.70% of the vote in the first round of the presidential election on 25 May 2014. He has vowed to forge closer links with the EU and
restore government control and peace in the insurgent-held eastern regions and has obtained backing from the United States and the EU.
Poroshenko previously served as head of the Security Council of Ukraine (2005) and minister of foreign affairs (200910) under the presidency of Viktor Yushchenko, and
then as minister of economic development and trade (2012) during the presidency of the now-deposed Viktor Yanukovych. Poroshenko is one of Ukraine's wealthiest men
with an estimated fortune of USD1.6 billion as of 2013, which he amassed on the basis of a multi-sector business empire under Ukrprominvest (Poroshenko has held no
official position in the holding group since 2005, which is nominally managed by his father Oleksiy), including Roshen, Ukraine's largest confectionary producer. According to
Forbes Ukraine, in March 2016 Poroshenko's wealth (transferred into a blind trust management in 2015) was estimated at USD858 million. .
PrimeMinisterVolodymyrGroisman
Volodymyr Groisman, the former parliamentary speaker, was appointed to head the Ukrainian government in April 2016, following former prime minister Arseniy Yatsenyuk's
resignation after months of political and public pressure. Groisman's cabinet was formed by the alliance of the president's Poroshenko's Bloc (Blok Petra Poroshenka, BPP)
and Yatsenyuk's People Front (Narodnyi Front, NF). According to local media outlets, Yatsenyuk's resignation was brokered by two of Ukraine's most influential businessmen,
Rinat Akhmetov and Ihor Kolomoiskyi. This indicates that the new cabinet is likely to be more susceptible to pressure from powerful local businessmen, such as Akhmetov
and Kolomoiskyi, compared to Yatsenyuk's more technocratic government. Groisman, a former mayor of Vinnytsia, the city where Poroshenko's business started, is seen as
one of his closest political associates. Groisman is Ukraine's youngest prime minister (he was appointed at the age of 38) and first Jewish prime minister.
CentralBankGovernorValeriyaHontareva
An economist by training, Hontareva built a career in banking in the 1990s and 2000s. She replaced Stepan Kubiv as Chairperson of the National Bank of Ukraine (NBU) in
June 2014, becoming the first female head of the bank. During her time at the NBU strict controls and restrictions on foreign currency transactions were introduced, and the
banking system was sanitised, with weak banks' licences revoked and the requirements for the remaining banks tightened.
Prosecutor-GeneralYuriyLutsenko
In May 2016 the parliament appointed Yuriy Lutsenko, a close ally of President Petro Poroshenko, to head the General Prosecutor's Office (Generalna Prokuratura Ukrayiny:
GPU), replacing Viktor Shokin. Before his latest appointment Lutsenko served as a head of the Poroshenko Bloc parliamentary faction. He has been a career politician since
1994 and was elected as an MP in 2002. In 200506 and 200710 he served as Minister of the Interior in the cabinets of Yulia Tymoshenko, currently head of the Fatherland
(Batkivshchyna) party. Lutsenko's appointment is controversial in Ukraine for two reasons. First, in February 2012, he was found guilty by a Kiev court of embezzlement and
was jailed for four years, although he was pardoned by then-president Viktor Yanukovych in April 2013. Second, the new head of the GPU has no law degree, a requirement
lifted by a legal amendment passed in AprilMay 2016 by the parliament and quickly signed by President Petro Poroshenko to enable his appointment. IHS assesses that
Lutsenko's appointment is aimed at strengthening Poroshenko's position in Ukraine.
Stateinstitutions
Constitution
On independence in 1991, Ukraine inherited the 1978 constitution adopted by the Ukrainian Socialist Soviet Republic. The constitution soon proved inadequate for the needs of the new state,
as it could not regulate interactions between state institutions. The problems were compounded by the creation of the post of president prior to independence. A new constitution, which was
approved by parliament on 28 June 1996, dismantled the remnants of the Soviet political system and mandated a pluralistic political system with protection of basic human rights and liberties.
The constitution also guarantees freedom of both speech and the press.
Under the 1996 constitution, Ukraine was a presidential-parliamentary republic, with the president controlling the government. This remained in force until 2004, when constitutional reforms
transformed Ukraine into a parliamentary-presidential republic. Parliament was the main beneficiary of the reforms, with control over the government effectively transferred from the president
to a parliamentary coalition. Parliament's mandate was lengthened from four to five years, its power over the appointment and dismissal of the government was increased, and the government
received greater autonomy from the executive.
Executive
The president of Ukraine is head of state and chief of the executive branch and is directly elected for a five-year term, which may be renewed only once. Executive power is exercised by the
supreme executive authority, the Cabinet of Ministers, members of which (including the prime minister) are appointed by the president subject to the approval of parliament. Attempts to alter
the constitution in 2004 and increase the powers of the parliament were reversed in September 2010. After Yanukovych was deposed on 21 February 2014, the country reverted to the 2004
constitution.
The prime minister shares some of the president's executive powers. Both the government and the president can propose and approve legislation. This is a potential cause of institutional
conflict between the two executive branches
Legislature
Ukraine's unicameral parliament, known as the Supreme Council (Verkhovna Rada), is the sole legislative authority and is responsible for initiating legislation, ratifying international agreements
, and approving and implementing the state budget.
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The 450 members of parliament (Verkhovna Rada) are elected for a four-year term by proportional representation on a party-list basis. Only those gaining more than 3% of the vote are
allocated legislative seats. Parliamentary coalitions can be made up of parliamentary factions or independent deputies, following changes to the Law on Parliament in 2010. Ukrainian election
law states that 50% of 450 deputies are elected under a proportional voting system and the remaining 50% by a majoritarian, first-past-the-post system.
Judiciary
The centralised character of the Soviet-era Ukrainian legal system has changed little since independence in 1991. District, or people's courts, oblast courts, and the Supreme Court all hear
cases at various levels of the judicial process.
Prosecuting and defending lawyers theoretically have equal status but cases are not tried in an adversarial manner and prosecutors typically have far greater influence. The president
nominates the prosecutor general, but the choice must be approved by parliament. Judges at regional level and above may not be members of political parties.
Ukraine lacks certain basics of a system of rule of law, such as provisions for oversight, accountability, participation, and equitable access. There is an absence of mechanisms that guarantee
the direct participation of citizens in enforcing social norms. Citizens lack greater access to the media and lawyers, and are deprived of effective representation in court.
The Constitutional Court consists of 18 judges, who are nominated for nine years. The president, parliament, and the Council of Judges appoint six each. The court decides on the issue of
conformity of laws to the constitution and interprets the constitution and laws (Article 147). During its existence, the court has struggled to assert its independence. The court's rulings have
exposed the difficulties it faces in finding the fine political balance between the branches of power. It has, on a number of occasions, been subjected to mounting political pressure, especially
from the president.
Regionalandlocal
Ukraine is divided into 24 regions (oblasts), and the capital city of Kiev (or Kyiv). The executive controls regional governors who are centrally appointed, not elected.
Externalrelations
Overview
Relations with Russia have deteriorated severely as a result of the overthrow of former president Viktor Yanukovych in February 2014, and Moscow's subsequent annexation of Crimea in
March. Russia has been critical of the new government and issued a series of demands, including guarantees of neutrality, rights for Russian speakers, and federalisation to give individual
regions much greater autonomy. Although fears of a Russian military intervention into eastern Ukraine have not materialised, the risk remains and will increase as the pro-Russian insurgency
in eastern Ukraine suffers setbacks against government forces. Kiev has accused Moscow of supporting the separatist insurgents operating in the Donetsk and Luhansk regions, something
the Kremlin has denied. Even after the crisis in eastern Ukraine comes to an end, the normalisation of Russia-Ukraine relations will be a complex and difficult process that is likely to take years
rather than months to come about, particularly after Kiev has taken further strides towards integrating itself into European structures.
The current focus of EU-Ukraine relations is the implementation of the political and economic provisions of the Association Agreement and Deep and Comprehensive Free Trade Agreement
that the two sides signed on 21 March and 27 June 2014, respectively, as well as the provision of loans and aid to stave off an economic crisis in Ukraine. Negotiations on the Association
Agreement had been under way since 2008. The Yanukovych administration's refusal to sign the agreement in November 2013 led to mass protests and ultimately the demise of the
government. The EU was initially slow to engage with the new authorities in Kiev, but Russia's annexation of Crimea forced the EU to take a more active role, and movement towards the
Association Agreement accelerated. Ukraine has stated that it will require further economic aid, in addition to the EU and IMF loans it has already received, if it is going to be able to bear the
costs of reorientating itself towards Europe and the West.
Bilateral
UnitedStates
RelationswiththeUnitedStates
The US has become a more important partner for Ukraine in the aftermath of the revolution that toppled former president Viktor Yanukovych's government in February 2014. The US
administration was the first to recognise the legitimacy of the new Ukrainian government and has shown strong support, both in pushing for IMF funds to be disbursed to Ukraine, and in
imposing sanctions on Russia in reaction to its annexation of Crimea and perceived support for the separatist insurgency in eastern Ukraine. The US will continue to support and advise
Ukraine's future government, viewing the country as a bulwark against Russia.
EuropeandCIS
RelationswiththeRussianFederation
Bilateral relations have deteriorated significantly following the mass protests that resulted in then-president Viktor Yanukovych fleeing the country in February 2014, which was followed by the
change of government in Kiev and the change of Ukraine's direction towards the West. Russia's subsequent annexation of Crimea and alleged involvement in providing military, financial and
political support to the separatists in Luhansk and Donetsk regions (situated in eastern Ukraine) together with Gazprom cutting off Ukraine's gas supplies and revising the conditions of sale
have meant that rebuilding bilateral ties will be a long and difficult process. Despite several attempts to negotiate, the two countries so far were unable to resolve the fallout from the crisis.
Russia's conditions for such talks include the Ukrainian government agreeing to decentralise power, guaranteeing that it will not join NATO, and ensuring the rights of the Russian speaking
population. Both Kiev and Moscow cannot agree on the implementation details of the Minsk II ceasefire agreement, as a result finding the political solution to the current crisis is unlikely in the
near term.
Additionally, Ukraine's association agreement with the European Union, likely to be implemented in stages despite the April 2016 referendum in the Netherlands, moves Ukraine further away
from Russia's sphere of influence. Under its current leadership, Ukraine is also building closer political and military ties with NATO and individual NATO members, including the US, Turkey,
Poland, Romania and Lithuania. Ukraine-NATO links, including frequent joint exercises, improved communication and access to training, aggravate its relations with Russia even further.
Relations had earlier been damaged by the arrival of Viktor Yushchenko as president in 2004 following the Orange Revolution. Yushchenko, along with fellow revolutionary leaders such as
Yulia Tymoshenko, represented a new reformist, pro-Western political leadership that was keen to break the country's previous reliance on Russia. This, and Moscow's forthright support for
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Yushchenko's rival in the 2004 presidential election that triggered the revolution, Viktor Yanukovych, led to a rapid deterioration in the bilateral relationship. This was further compounded in
December 2005 by the first of several disputes over the supply of Russian natural gas to and through Ukraine, leading to Russian gas exports being shut off temporarily. Yanukovych's
presidency from 2010 to 2014 saw an improvement in relations.
RelationswithMoldova
Ukraine is Moldova's eastern neighbour, although most of the Moldovan-Ukrainian border is de facto the border between Ukraine and Transdniestria. Ukraine is also, along with Russia, a "
guarantor" state in the negotiations about the future status of Transdniestria. Prior to 2004, the Ukrainian leadership mostly followed Russia's lead on the issue, but following the 2004 Orange
Revolution in Ukraine and the coming to power of former president Viktor Yushchenko, Ukraine sought to carve out an independent policy vis--vis Moldova. Yushchenko presented his own
plan to resolve the conflict, and in 2006 Ukraine tightened customs regulations on the Transdniestria border, requiring Transdniestrian companies to register with Moldovan authorities in order
to export goods. Following Yushchenko's loss of a parliamentary majority in 2006 and the return of the more Russia-friendly Viktor Yanukovych to the presidency in 2010, Ukraine's role in the
Transdniestria issue became less active. Attempts to add impetus to the negotiations during the 2013 Ukrainian chairmanship of the OSCE did not lead to any significant breakthroughs. The
instability in Ukraine in late 20132014, including the ouster of Yanukovych and Russia's annexation of the Crimea region, has led to a worsening of relations between Moldova and
Transdniestria. The Transdniestrian authorities have complained that increased security measures on its border with Ukraine amount to a "blockade", and called on the Russian government to
allow it to accede to Russia along with Crimea. Moldovan politicians have condemned the Crimean annexation and expressed concern about the potential precedent this sets for Transdniestria
.
Multilateral
Globalorganisations
RelationswiththeNorthAtlanticTreatyOrganisation(NATO)
NATO membership will be the main sticking-point in negotiations between the West, Kiev, and Russia about the future of Russian-Ukrainian relations. Russia will be reluctant to acknowledge
the legitimacy of Ukraine's new government unless guarantees are offered that Ukraine will not be pursuing NATO membership. Although the West is unlikely to offer such assurances, the
new Ukrainian government has stated that is has no intention of seeking NATO membership. NATO has been one of the most vociferous critics of Russian action during the ongoing crisis in
Ukraine, and has taken a leading role in highlighting build-ups of Russian military forces on the Ukrainian border. Although the new leadership in Ukraine may not be seeking full membership,
co-operation with NATO can be expected to increase in the coming years as Kiev seeks to bolster its relations with the West and restore its ailing military capabilities.
Attempts at strengthening co-operation and moves towards possible Ukrainian membership of NATO initially received a boost after the Orange Revolution and Viktor Yushchenko's election in
2004. However, continual political instability within Ukraine during Yushchenko's presidency, low public support for NATO membership and the arrival of a more pro-Russian president and
government in 2010 damaged Kiev's hopes of receiving a Membership Action Plan (MAP) and a timeline towards full membership.
Ukraine joined the Partnership for Peace (PfP) programme in January 1994. The programme aims to develop military and political integration between NATO members and their neighbours,
as well as encouraging domestic reforms. In 2003, Ukraine also began to undertake annual action plans with NATO in pursuance of all-round domestic reforms. These action plans set
demands upon Ukraine that are little different to those of a MAP, with the only distinction being that action plans are not preparation stages for eventual NATO membership.
Regionalorganisations
RelationswiththeEuropeanUnion
EU-Ukraine relations have improved substantially with the coming to power of pro-European political forces in Ukraine in February 2014. The mass protests that led to the ouster of President
Viktor Yanukovych that month initially started when Yanukovych refused to sign the EU-Ukraine Association Agreement in November 2013, opting instead for economic assistance from Russia
. Following the change in government, the political parts of the agreement were signed in March and the economic parts in June 2014. The economic parts of the agreement include a Deep
and Comprehensive Free Trade Agreement, which will open up the EU market to Ukrainian exports. The current focus of relations involve the implementation of the Association Agreement as
well as the provision of loans and aid to stave off an economic crisis in Ukraine. Ukraine's association agreement with the EU is likely to be implemented in stages despite the April 2016
referendum in the Netherlands.
Ukraine was one of six former Soviet countries that joined the Eastern Partnership Programme launched by the EU in May 2009. The partnership is designed to build closer ties with former
Soviet states without going as far as offering a formal path towards full membership. The fact that a more formal membership accession process has not been offered to Ukraine, even during
the strongly pro-Western foreign policy of former president Yushchenko, is largely because of the dilemma the EU faced over Ukraine's seemingly endless domestic problems, as well as other
issues such as EU enlargement fatigue.
Externaltrade
Overview
Ukraine imports oil and natural gas from Russia and Turkmenistan and technology from Western Europe. It also imports lumber and paper. Its main export products are steel, chemicals, and
machinery and heavy equipment. The structure of Ukrainian exports makes the country extremely sensitive to changes in world-market conditions. Prices of ferrous metals (especially steel)
and chemicals vary substantially year to year and may dramatically affect export revenues. Export prospects will continue to be strongly dependent on aggregate demand trends in Russia and
elsewhere in the Commonwealth of Independent States, as well as Turkey and the Eurozone. Ukraine accomplished World Trade Organization membership in May 2008. This was a critical
step that enabled the country to broaden and diversify its export base; secure trade routes, thus reducing risks for trade sanctions; and lay the foundation for balanced economic growth in the
longer term, diversifying away from the current dependence on heavy industries, such as steel.
Data
Ukraine:MajorTradingPartners,2014
EXPORTS
Country
IMPORTS
BillionsofUSD
PercentShare
Russia
9.8
18.2
Turkey
3.6
6.6
2016IHS.
Country
BillionsofUSD
PercentShare
Russia
12.7
23.3
China
5.4
9.9
page 26 of 43
Egypt
2.9
5.3
Germany
5.4
9.9
China
2.7
5.0
Belarus
4.0
7.3
Poland
2.6
4.9
Poland
3.1
5.6
Italy
2.5
4.6
United States
1.9
3.6
India
1.8
3.4
Italy
1.5
2.8
Belarus
1.6
3.0
Hungary
1.5
2.7
Germany
1.6
3.0
Turkey
1.3
2.4
Hungary
1.5
2.8
France
1.3
2.3
Source: IMF, Direction of Trade
Ukraine:MajorTradingPartners,2000
EXPORTS
Country
IMPORTS
BillionsofUSD
PercentShare
Russia
3.5
24.1
Turkey
0.9
Germany
Country
BillionsofUSD
PercentShare
Russia
5.8
41.7
6.0
Germany
1.1
8.1
0.7
5.1
Turkmenistan
0.9
6.8
United States
0.7
5.0
Belarus
0.6
4.3
Italy
0.6
4.4
Kazakhstan
0.4
3.0
China
0.6
4.3
United States
0.4
2.6
Poland
0.4
2.9
Italy
0.3
2.5
Bulgaria
0.4
2.6
Poland
0.3
2.2
Hungary
0.3
2.2
France
0.2
1.7
Belarus
0.3
1.9
Switzerland
0.2
1.6
Source: IMF, Direction of Trade
Economicdevelopment
Overview
Industrialization,theSovietheritage,andthecollapseoftheSovietsystem: Throughout its history, Ukraine has been a leading agricultural producer because of its fertile black soil. In the
1930s, Ukraines heavy industry developed rapidly under Soviet rule, particularly in the mineral-rich Donetsk and Kryvyi Rih regions, where industrialization had begun early. However, Ukraine
had to bear the cost for this fast development in the form of extreme famine in 193233. In the 1980s, the Ukrainian economy deteriorated as production slackened under the inefficient
socialist economic organization. The collapse of the Soviet Union in 1991 hit the Ukrainian industrial sector hard, causing a dramatic output decline. Ukraine's economic demise was
exacerbated by hyperinflation in 1993.
Stabilizationduringthemid-1990safterapainfultransitionperiod: Stricter monetary policies, combined with enhanced financial discipline introduced in late 1994, resulted in
macroeconomic stabilization that led to another economic achievement: the 1996 introduction of a new currency, the hryvnia. However, the hryvnia proved stable only until contagion from the
1998 Russian financial crisis significantly weakened the currency's exchange value. Meanwhile, the dire macroeconomic situation led Ukraines public sector into virtual default in 19992000,
although the actual debt level was not excessively high compared with Ukraines peers.
ArecoveryfinallystartedaftertheRussianfinancialcrisisin1998. After the Russian crisis and virtual default, the government eventually succeeded in passing a privatization law
promoting transparent procedures, introducing key agricultural reforms, and strengthening payments collection in the corrupt energy sector. Ukraine posted impressive growth during 200007,
as rapid gains in the industrial sector more than offset occasional crises elsewhere in the economy. Confidence surged, and the economy seemed largely decoupled from Ukraines fractious
political scene. Alongside low budget deficits and a rapid increase of foreign reserves, public foreign debt decreased and the Ukrainian sovereign even became a net international creditor.
Ukrainewashithardagainbytheglobalfinancialcrisisin2008. All these valuable economic achievements were wiped away by the global crisis, which hit Ukraines key export sectors
and financial markets as foreign financing was cut short. During the boom years, almost no provisions were made by the government for a less benign time, and when the crisis unfolded, the
government was unable to pull off a reasonable response. Ukraines development was set back by several years as a result.
TheUkrainianeconomyandthepublicsectorstillbegreformtoenhancetransparencyandmarketmechanisms. Pressing reforms include restructuring agricultural policy,
recapitalizing the banking sector, increasing transparency in the gas sector, raising domestic retail energy prices to cost-recovery, and introducing more energy-payment discipline.
Rationalizing public spending, tackling corruption, and closing tax loopholes are also paramount. The financial sector is still quite fragile and prone to sudden changes, including sharp swings
of interest rates. Inflation outbursts have been quite common, partly due to spendthrift policies and supply-side shortages in selected markets.
Labormarkets
2016IHS.
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Demographicdeclinefollowedeconomicwoesinthe1990s. As a result of reduced life expectancy, lower fertility rates, and outward migration, Ukraines population is in decline. The
population has fallen from just above 52 million at the beginning of the 1990s to around 42 million in 2015, which also reflects the loss of Crimea. This trend is likely to continue in the long term
(although the pace of decline will moderate), unless social conditions improve markedly and the income level is raised across the different layers of Ukrainian society. Ukraines society is aging
, and the social burden of this trend will exacerbate the social problems that already exist. At the same time, young talents are emigrating, depriving the economy of much of its potential.
Thelabormarketimprovedinthecontextoftheprecrisisboom. Although economic activity has been quite furious during the first half of the current decade, unemployment has fallen only
gradually, as many workers who were still officially employed were put on administrative leave during the 1990s. However, the deep recession during 201415 has again sent the
unemployment rate to new highs.
Theeconomiccrisistriggeredaseveresocialandemploymentcrisis,whichgenerallyunwoundduringtheensuingrecovery. Unemployment was bouncing again as the crisis
unfolded at the end of 2008. Layoffs and wage arrears became quite common again, with public support in the form of unemployment entitlements rarely available and relatively low. The
government tried to cushion the blow by raising social transfer levels and public-sector wages. The social situation and the labor market improved as the recovery gathered traction since 2009.
However, these troubles returned in full force since the economic downturn set in starting in 2014. Ukraines average hourly wage level has remained extremely low by European standards.
Shadowactivitiesandblackmarketemploymentarestillwidespread. This makes an assessment of Ukraine's labor market fairly difficult; however, the strong reduction of unemployment
and the concomitant increase of employment until 2008 suggested that reform efforts, such as the introduction of a flat income-tax rate, helped to cut back black markets to some extent.
However, the wedge between gross and net wagesand hence, incentives for black market employmentis still fairly high by international comparison, with social insurance payments taken
into account.
Monetarysystem
Ukraine has a standard two-tier banking system, with the National Bank of Ukraine (NBU) maintaining monetary policy. The law governing the NBU established its independence in 1999.
Several important amendments were introduced in 2010. Since 2010, the highest management body is the Board of the National Bank, which is responsible for all aspects of bank
management and makes recommendations to the cabinet of ministers regarding the influence of state borrowing and taxation on monetary and credit policy. The NBU governor has a
seven-year term and may be dismissed by a resolution of the Supreme Council. Until 2010, the board of the central bank was subordinate to the central banks council, but the latters powers
were greatly reduced. As a result, the council went on a de facto hiatus since 2010, while still existing formally. Guarantees of noninterference in theory ensure the independence of the NBU.
In practice, the situation is less clear-cut, with cabinet ministers permitted to attend and vote in sessions of the NBU board, governing the management of monetary policy.
Ukraines currency is the hryvnia, which in 1996 replaced the temporary coupon currency, the karbovanets, introduced in 1992 after the Soviet rouble ceased to be legal tender. The
exchange-rate structure is unitary in principle, although a considerable difference has often emerged between the official exchange rate as quoted by the central bank and the market
exchange rate on the interbank foreign-exchange market. The official exchange rate is used by residents and nonresidents in foreign-exchange transactions as well as in other transactions
determined by legislation. The exchange-rate regime is regulated by restrictions on the sale and purchase of foreign exchange on the official currency exchange in Kiev. Following a brief
period of more flexible exchange rates, the central bank installed a highly regulated system in the first quarter of 2009 to gain control over the hryvnias exchange rate, with some regulations,
such as the ban on selling and purchasing foreign exchange within one trading day, which was lifted in June 2011. Moreover, the NBUwhich sets the official exchange rate of the hryvnia
against the US dollar on the basis of quotations on the interbank markethas been very actively intervening in the foreign-exchange market.
Monetary policy is obstructed by the lack of a sophisticated money market, making the central banks indirect policy instruments, such as the policy rate, rather inefficient in combating
money-supply growth and hence inflation. Even so, the NBU directs a full range of monetary policy tools, including a policy rate and minimum reserve requirements. Moreover, the central bank
has extensively auctioned deposit certificates as a means for banks to store excess liquidity and has purchased Treasury papers on the market to provide liquidity to the state.
Financialsystem
Ukraine crossed a major economic hurdle in 2000, as parliament passed a landmark law to reform the banking sector. The old banking law was widely regarded as outdated and irrelevant, as
it was introduced nine years before, when Ukraine's banking sector barely existed. The new law laid down procedures for opening, liquidating, and restructuring commercial banks; establishing
banking unions; and specifying the minimum starting capital for a bank.
A series of foreign investments were made into the Ukrainian banking and financial sector since 2005 that boosted the share of foreign ownership in banking assets. These takeovers not only
enhanced banking services to clients, but they also made best practices in terms risk surveillance, reporting, and accounting standards more widespread. As the global recession unfolded,
however, most foreign investors took severe losses, causing some of the investors to consider withdrawing from the market again.
The country's pre-2008 boom period saw excessive lending growth (particularly in foreign currency), asset-price inflation, and a general loosening of lending standards. Severe external funding
risks then materialized when the global financial crisis struck in 2008. Asset quality deteriorated significantly, and nonperforming loan levels soared. The recovery, in the form of recapitalization
and reduction in levels of negative net open position, turned out to be transient.
Following political and economic turmoil in 2014, Ukraines banking sector plunged into yet another crisis. Since mid-2014, it has seen a number of bank closures, which in the long term will
help rid the industry of less resilient lenders. Near-term sovereign support capability is limited, even in case of systemically important banks, and depends on Ukraines continued access to
International Monetary Fund support.
The Ukrainian securities market was created in the early 1990s. Its initial purpose was to facilitate the restructuring of privatized enterprises, but it has now developed a wider range of
institutions. The majority of trading on the primary and secondary stock markets takes place on the First Stock Exchange Trading System (PFTS), which started with over-the-counter trade in
1996, but is now operating an electronic trading platform.
The underdeveloped and fragile securities market is over-regulated and lacks transparency. In 1996, the State Securities and Stock Market Commission (SSMSC) was created in line with new
rules for state regulation of the securities market. The SSMSC tightened controls on non-organized trading in order to improve transparency in 1999, and new regulations to protect minority
shareholders were issued in October 2000. Nevertheless, the commission lacks sufficient resources to regulate the market properly.
Naturalresources
Ukraine is rich in natural resources. About half of the land area, especially in the central and southern regions, consists of a rich black top soil ( chernozemye), and is a fertile plain ideal for
agriculture. Indeed, Ukraine was dubbed the breadbasket of the former Russian empire and the Soviet Union, but the agricultural sector still bears the scars of forced collectivization during the
late 1920s and the socialist heritage. About 17% of the Ukraine's territory is covered by forests. The Donetsk Basin in the southeast holds large deposits of coal and the Kryvyi Rih area in the
east central part is endowed with considerable amounts of iron ore, while south central Nikopol area has some of the world's largest manganese deposits. In addition, there are significant oil
and natural gas resources located in the Carpathian foothills, the Donetsk Basin, and along the Crimean coast, although the last was annexed by Russia in March 2014.
2016IHS.
page 28 of 43
Nonconventional resources of gas have been discovered as well, as well as offshore fields, of both oil and gas. Ukraines own endowments currently cover only part of its energy consumption
from primary sources such as natural gas and oil, and the country critically relies on imports of natural gas in particular, which mainly come from Russia and through reverse flow from the
European Union. That may change once shale gas reservoirs are eventually extracted.
Keysectors
Industry: Despite important modernization investments in some sectors in recent years, much of Ukrainian industrys capital stock is still antiquated, and fairly energy intensive.
Specifically, the important mining sector still suffers from obsolete equipment and inefficiency. The huge potential of Ukraine is not in doubt, but the short- and medium-term risk for all
investors other than the most specialized ones, remains high. A viable and convincing structural reform program is needed to unlock this potential. Because of the emphasis in the
Soviet Union on heavy industry, Ukraine remains one of the most industrialized economies in Europe, at least in terms of industrys share in total gross value added. Moreover, almost
one-third of all workers are employed in the industrial sector. Light industries remain underdeveloped, however, and industrys capital stock still awaits large-scale modernization. A case
in point is the low energy efficiency of the sector, which ranks among the worst in the world; a key area of concern when considering growing energy demand. Heavy industries like
metals, including steel production, dominate the scene, while chemicals production, as well as machinery and equipment, play an important role, too. The loss of the Luhansk and
Donetsk regions to pro-Russian rebels dealt a blow to Ukraines overall industrial capacity.
Metallurgy/SteelProduction: Ukraines economy suffered double-digit declines during and after the 200809 global crisis, and is set to experience the same in 2015. The earlier
downturn was partially due to a severe slump in Ukraines low value-added exports, such as steel, which the country greatly depends on. Base metal and steel exports contribute up to
3040% of total export revenues. The sector thrived during the boom in demand for global commodities from 2003 onwards, but it virtually collapsed as the global economic crisis hit at
the end of the decade. In addition, Ukrainian steel exporters have been struggling to maintain their market share in the face of stiff competition with subsidized Chinese steel exports.
Most of the Ukrainian firms remain energy inefficient, when compared to their global competitors, which adds to their production costs and negatively impacts their competitiveness.
Agriculture: Agriculture, which includes forestry and fishing, accounts for around one-tenth of gross value added, which is relatively high for an industrialized country, but still
reasonable given the abundance of fertile black soil. Primary crops are wheat, corn, and sugar beets. Raising livestock (cattle, hogs, sheep, and goats) is also common. The sector
employs some 20% of the workforce. The heritage of Ukraine's Soviet past is still seen in the organization of agricultural production: collective co-operatives and state-owned farms
remain common, although most fruit and vegetables crops are produced on small private plots. Even though agriculture continues to be heavily subsidized by the government, sectoral
output remains lower compared with the level achieved under Soviet planning. Forestry (in the Carpathian Mountains in the west) has declined since excessive timber harvesting in the
1950s and 1960s, and Ukraine now needs to import most of its lumber and paper. The fishing industry has also seen a sharp decline since independence.
OilandGasTransport: Ukraine has been important as the main transit state for Russian gas exports to Europe, with approximately 85% of Russian gas supplies destined for Europe
crossing Ukrainian territory prior to Russias Nord Stream pipeline becoming operational in 2012. This share has now been reduced to 65%unwelcome news for cash-strapped
Ukraine, which is seeing a consistent reduction in its transit-fee revenues. Ukraines share of Russian transit gas has been shrinking, to 50% in 2014. At the same time, transit fees are
still an important source of external revenue, but the Soviet-era Ukraine gas transit system (GTS) has suffered from years of under-investment in maintenance. Ukraine also plays a
major role in transporting Russian oil exports to European markets, both via the southern branch of the Druzhba pipeline and via its Black Sea ports.
Ukraine:Top-10SectorsRankedbyValueAdded
2015Level
2016PercentChange
PercentShareofGDP
(Bil.US$)
(Realterms)
(Nominalterms)
1. Retail trade - total
7.2
-2.3
8.9
2. Agriculture
7.0
-1.4
8.6
3. Wholesale trade
6.9
-2.9
8.5
4. Education
5.1
-7.0
6.3
5. Land transport
4.7
1.6
5.8
6. Public Admin. & Defense
4.2
-5.2
5.2
7. Real estate
4.0
1.3
4.9
8. Health and social services
3.9
-7.1
4.8
9. Business services
2.9
1.3
3.6
10. Electricity, gas, & steam
2.6
0.9
3.3
Top-10Total
48.6
59.9
Updated: 14 October 2016

Source: World Industry Service, IHS Economics
2016 IHS
Businessenvironment:Legalsystem
Important legal changes have been made in recent years, including essential overhauls of Ukraine's key legal codes, plus new land and anti-monopoly legislation. Ukraine's
legal system is currently being reformed in order to achieve court independence and to reduce corruption, with the entire judicial corps being overhauled since October 2015.
However, the legal environment remains difficult to navigate. Successive governments, including the current pro-Western one, have been slow to tackle legislative reform.
Conditions attached to IMF funds, approved in March 2015, and the implementation of an Association Agreement with the EU will lead to further legal reforms. The current
anti-corruption drive of the reformist government is aimed at removing corrupt officials and practices from the legal system as well, but the anti-corruption reform proceeds
slower than initially anticipated both by Western sponsors and the Ukrainian public.
Businessregulation
Disputeresolution
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Ukraine is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In January 2002, new legislation took effect on the
recognition of foreign court judgments. Investors still need to make a careful review of the various international agreements to which Ukraine is a party and to adhere to a
well-structured dispute resolution provision. Moreover, the law contains a tight deadline for the submission of foreign court decisions for enforcement in Ukraine, within three
days of the foreign judgment taking effect.
In June 2003, parliament approved a law on arbitration to facilitate the creation of proper arbitration tribunals. The law allows any type of civil or commercial dispute to go to
arbitration, if there is an agreement between the parties, except in some cases defined by the law.
A decree issued in April 2002 gave the Foreign Investment Advisory Council (FIAC), established in 1998, new powers to mediate in disputes between foreign investors and
the Ukrainian authorities or government-owned companies.
Companylawandcorporategovernance
Company Law in Ukraine does not fully meet European standards despite the recent reforms. While a number of corporate governance-related laws have been adopted by
successive parliaments, issues relating to shareholders' rights as well as transparency remain. There are shortfalls in implementation of legal provisions against such
practices as insider dealings, corporate raiding, and illegal profit-taking, including to offshore destinations.
Corporategovernance: In 2000, minority shareholders gained better protection against dissolution of their stakes with the approval of new regulations prohibiting companies
from issuing "phantom shares" to outsiders without first offering them to existing shareholders, meaning that control of companies could pass to outsiders. Although the ban
was in theory already present in existing company law, it was so vague that Ukrainian companies were regularly able to violate it. Shareholders now have to be notified of new
emissions, after which existing shareholders have 15 days to exercise their right to buy.
Furthermore, the legislation introduced in January 2002 required the general assembly of shareholders of joint stock companies to be held on the territory of Ukraine and, as a
rule, at the company's factual location. Formerly, the law did not specifically define where the general assembly of shareholders of a joint stock company could be held,
allowing foreign investors to participate from their offices abroad. The amendment does not, however, apply to 100% foreign-owned companies. Its purpose is to ensure the
rights of minority shareholders to participate in the general assembly in the past, majority shareholders could avoid the presence of minority shareholders at the general
assembly by convening the general assembly outside the territory of Ukraine. Still, the new amendment takes away the shareholders' right to choose to hold a general
assembly outside of Ukraine even if all shareholders give their prior consent. The practical issues surrounding the efficiency of this new requirement, however, have led to
natural scepticism about its enforcement. Further change in 2008 protected companies from hostile takeovers, with the introduction of criminal responsibility for such. In April
2009, a joint stock company law entered into force, which streamlined corporate practices. Further amendments to the joint stock company law, adopted in 2015-2016,
introduced additional streamlining and improved shareholder rights.
Procedures: Foreign investors can form a wholly owned subsidiary, a joint venture (limited liability or joint stock), or a representative office. These entities must be registered
in order to benefit from the guarantees and rights provided by foreign investment legislation. The range of documents required for registration includes:
An application.
Proof of the parent company's registration in its country of main operation.
Credentials from a foreign bank where the foreign company has accounts.
The board of directors' authorisation to register an entity in Ukraine.
The new entity's charter document.
Ukrainian law required companies to have three mandatory components: a supervisory board, a management board which is an executive body, and a shareholders' meeting.
In addition, an audit commission must also be installed within the company.
Enterprises with foreign investment are defined by law as having at least 10% foreign ownership. There are no minimum capitalisation requirements. The process of forming a
joint stock company is estimated at two to five months, although it may take longer as the process is often complicated with bureaucratic red tape, especially outside the
capital. The application is handled by the Ministry of Economy and costs about USD210. Legislation giving legal validity to electronic signatures and documents is effective
since 2003.
Bankruptcy
The 2000 Ukrainian bankruptcy law introduced new definitions and procedures, making debt settlements and company restructuring possible where previously they had been
virtually unknown. Certain claims, such as liquidation costs and employees' salaries, come before secured creditors' claims. Since 2013, the law was amended to improve the
secured creditors' rights. Work is under way towards better-defined cross-border insolvency rules. Nevertheless, concerns remain about the effectiveness of the bankruptcy
regime and the efficiency of its implementation.
Competition
Anti-monopoly regulations have improved in the past two decades although there is still a long road ahead. Ukraine's Anti-Monopoly Committee (AMC) was formed during
19941995. Although the AMC has been in place for some time now, it has yet to become effective in breaking the oligarchic structures in the Ukrainian economy. The
problem in this area is linked not to the absence of the required legislation but by the poor implementation of anti-monopoly measures. However, the transparency and
efficiency is now improving: the AMC is required to publish all of its rulings since November 2015.
2016IHS.
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The 2001 law "On the Protection of Economic Competition" (effective from March 2002) set the fines to up to 10% of earnings from the previous year for violating the rules on
restrictive agreements, 5% if a merger or similar transaction that restricts competition takes place without the AMC's approval. However, if the profit gained from the
anti-competitive activity constitutes more than 10% of a company's earnings, the penalty may be increased threefold. The AMC is allowed to enter private property to conduct
investigations, but has to obtain a court order first.
The general threshold for market dominance is 35% (50% for the combined share of no more than three companies with the largest shares of the same market, 75% for not
more than five). Notification of mergers (or other economic concentrations) is required where total assets or turnover in the last financial (including that abroad) exceeded
EUR12 million and those of at least two parties to the merger exceeded EUR1 million. The total assets or turnover in Ukraine only of at least one party must also have
exceeded EUR1 million.
Employment
In August 2003, the cabinet gave its approval to a labour code that put labour relations on a fully contractual basis. In general, working time is restricted to 40 hours per week,
with a five-day working week. An employer may introduce a six-day working week, but employees may then not work more than seven hours in a day. Employers have the
right to hire an employee for a three-month probationary period during or at the end of which the employer may discharge the employee if he or she is "unfit for the position".
Under the law, overtime is restricted to four hours in any two-day period or 120 hours in a year. The law also requires overtime to be paid at double rates.
Since May 2009, a regulation on work permits, Resolution No 322 "On Approval of the Procedure of the Issuance, Extension and Annulment of Work Permits for Foreign
Citizens and Stateless Persons", was approved. This complicated the work permit issuance procedure.
Currently a new labour code is being debated in the parliament which is meant to supplant the previous outdated one. It is aimed at streamlining labour relations procedures,
increasing contractual flexibility and abolishing some of the Soviet rudiments such as the "labour book". The new code will provide provisions for remote working and weekly
wage payments if agreed by the employers and employees. The new code is expected to be adopted before the end of 2016.
Environmental
Ukraine has significant environmental problems, most of which are linked to the Chernobyl nuclear power plant disaster in 1986 and industrial pollution, especially in the
industrialised east of the country. The Chernobyl power plant was closed permanently in December 2000. The environmental framework is still relatively undeveloped, but is
improving. Legislation on hazardous waste was passed in early 2002 following Ukraine's accession to the Basel Convention on the Control of Trans-boundary Movements of
Hazardous Wastes and their Disposal. The new law makes company owners responsible for the correct handling and storage of hazardous waste on their facilities, and
clarifies the situation that arises here when an enterprise that has hazardous waste on its premises is privatised. It also introduces licensing requirements for various
waste-handling operations, including the import of hazardous waste and the collection of hazardous by-products from raw materials for reprocessing. It permits the
government to set quotas for the importation of hazardous waste into the country. Ukraine has also established a Ministry of Environment and has introduced a pollution fee
system, but enforcement of this system is lax. Ukraine ratified the Kyoto Protocol in April 2004. Ukraine signed the UN Paris Agreement on greenhouse emissions mitigation
in April 2016 but has yet to ratify the document.
Intellectualproperty
Ukraine has adopted a number of regulatory measures and laws on the protection of intellectual property, propelled especially during the WTO accession process. A package
of intellectual property laws on trademarks, industrial designs and patents took effect at the beginning of 1994. These laws, further amended in 1999 and 2000, form the
backbone of Ukrainian intellectual property legislation. Ukraine is also party to a number of international conventions such as the Madrid Agreement on trademark registration
and the Paris Convention on the Protection of Industrial property, which provide additional protection in the country for registrations in member states. In addition, a 1999
resolution replaced the old Patent Agency with an Institute of Intellectual Property. Patents are issued for 20 years, utility model patents for 10 years (extendable for a further
three). Amendments in 2000 made copyright and trademark offences punishable by two years' imprisonment or a fine.
Legislation on compact disk production necessary for WTO membership was finally passed in mid-2005. Inadequate measures for preventing rampant compact disc piracy led
the US to impose sanctions on Ukraine worth USD75 million in 2002 and again in 2003.
The lack of proper implementation of intellectual property rights protection regulations remain problematic in Ukraine even under the current pro-reform government and can
be a deterrent for prospective investors. Furthermore, the legislation has yet to develop to address key issues like defining a commercial name or regulations with regards to
termination of rights to a commercial name.
Financialcrime
Ukraine ratified the Strasbourg Convention on combating financial crime in 1997, but failed to adopt a special legislation and a set of amendments to the criminal and banking
codes, despite establishing some working groups on the issue. For this reason, the Financial Action Task Force (FATF), a respected international agency for combating
financial crimes, blacklisted Ukraine as a non-co-operative state in 2001. The country was removed from the list in October 2011and is currently off the blacklist now thanks to
its proven effort to take legislative steps against financial crimes. A database of financial fraud cases is currently being created.
Land
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Land
The new land code, finally passed by parliament in late 2001, allowed the purchase and sale of agricultural and other land, but not until 2005. The moratorium was
subsequently extended and remains in force at present (it was last confirmed in November 2015 to be effective until 1 January 2017). No individual landowner will be able to
sell more than 100 hectares of land until the moratorium is lifted. The law also does not allow the sale of agricultural land to foreigners, although they will be able to own the
land on which they have company facilities, and other non-agricultural land if it is outside a built-up area. Many of the laws that currently govern Ukraine's agricultural sector
were passed in 19921993, when Ukraine had little market experience, and they now need upgrading and co-ordinating. Most of the necessary bills are still languishing in
parliament, and the decrees passed earlier remain largely ineffectual due to problematic implementation. Uncertainty over land ownership and rights has emerged as source
of bribery and corruption in the past several years.
Foreignexchangeandprofitrepatriation
Foreign investors have the right to repatriate profits in foreign currency, as well as their original investment. This right is guaranteed if they have registered with the authorities.
However, in November 2012, the Central Bank of Ukraine took a measure requiring the country's exporting companies to convert 50% of their foreign-exchange earnings into
hryvnia. The bank explained the move in a statement, saying that it was to support "currency market stability and bringing equilibrium to the balance of payments". The
Ukrainian authorities have justified pegging the hryvnia to the US dollar at the rate of UAH8.00/USD1.00 as a nominal anchor for the economy, but external observers,
including the IMF, have urged authorities to adopt a more flexible approach to accommodate the widening external deficit; as a result the hryvnia depreciated substantially in
2013-2016. As well as businesses, the new rule applies to individuals who receive more than UAH150,000 a month transfers from abroad. The move comes after the
unicameral parliament, Verkhovna Rada, backed capital controls.
Additionally, from January 2015 Ukraine introduced taxation on profit repatriation at a rate of 15%. However this new measure includes exceptions. Also, the tax is not applied
if a bilateral treaty on avoidance of double taxation is in place. Ukraine has these agreements with dozens of countries, including the UK, US, Canada, Italy, Portugal, Czech
Republic and others.
Investmentprotection
The 1996 Law on the Foreign Investment Regime generally provides protection from nationalisation unless it is a case of national emergency or epidemics. The law also
provides for the equal treatment of businesses with foreign participation and fully Ukrainian ones. Nevertheless, there are some sector-specific restrictions on foreign
investment, notably in banking and telecommunications (although 2001 legislation raised the 49% cap on foreign investment in the insurance sector). Other sectors, such as
armaments, are completely closed off to foreign investment. Finally, certain "sensitive" sectors require a licence. For example, import licences are required for agricultural
chemicals, pharmaceutical products, veterinary medicines, cosmetics and hygiene products. The expropriation of property remains very rare - it has only been used against
certain individuals linked to former president Viktor Yanukovych, ousted in February 2014, and to his business associates. In May 2016 Ukraine introduced amendments to
the investor rights protection, improving minority shareholders rights and streamlining regulations
Ukraine's previous governments have established several special economic zones, some of which have helped to attract foreign and domestic investors. However, they have
also attracted a fair number of shady operators, particularly in the east of the country where vast areas would be declared special economic zones in order to escape tax.
Consequently, the zones have been abolished. There is much talk currently about rejuvenation of the zones and the creation of additional industrial zones for domestic
investment, however the current government does not support the move. Ukraine holds a number of bilateral agreements envisaging protection of investments, which should
be advised while conducting due diligence.
Privatisation
Ukraine's privatisation efforts are notorious. Some major industrial assets have been subject to nationalisation over allegedly corrupt sale processes, while many others,
telecommunications company Ukrtelecom in particular, have seen so many announcements of their imminent sale that one does not react to them at all eventually. Despite
the pledges of successive governments to privatise over 3,000 companies, only a fraction have gone through the process, although it is noteworthy that in 2011 nearly 10
years after considering its privatisation state-owned Ukrtelecom was partially privatised. Ukraine is likely to proceed with the process in the coming years since most of the
companies are in dire need of financing. However, continuous problems with lack of consistency in state policies with relation to privatisation, combined with operational
difficulties such as corruption and bloated bureaucracy and, since 2014, annexation of Crimea by Russia and an armed conflict in east Ukraine, have made Ukraine less
attractive for foreign investors.
The current pro-Western government aims to privatise much of the remaining state-owned companies and compiled a list of 330 companies to be privatised in 2016-2017.
Given little investor interest in purchasing these assets, the success of the current programme remains unlikely. Exclusion of Russian companies from the privatisation
programme for political and security further hinders its success.
Procurement
Legislation approved in 2000 gave priority to bids by Ukrainian manufacturers over foreign ones, even if the price offered by the local company is up to 10% higher. The terms
offered by the two rival bidders for the contract must be otherwise equal, however. If a foreign bidder is in fact chosen (either because the nearest Ukrainian offer is over 10%
more expensive or because the foreign bidder offers more advantageous non-price terms), all raw materials, labour and services that form part of the contract must be
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provided in Ukraine by Ukrainian companies. Although tender procedures have improved on paper, poor notification procedures and ineffective dispute resolution provisions
still dog procurement in practice. State monopolies contend the provision of their partaking in tender auctions on the same footing as other companies.
Since 2015 Russian companies are excluded from the government procurement in Ukraine for security and political reasons.
Majorinternationalagreements
Disputeresolution
1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1961)
1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) (2000)
1971 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (2001)
Trade
World Trade Organization (16 May 2008)
Ukraine - EU Association Agreement (provisional since 1 January 2016)
Intellectualproperty
Paris Convention for the Protection of Intellectual Property (1991)
Madrid Protocol on the International Registration of Marks (1991)
Berne Convention for the Protection of Literary and Artistic Works (1995)
Geneva Convention for the Protection of Producers of Phonograms (2000)
Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations (2002)
WIPO Copyright Treaty (2002)
Patent Law Treaty (inc. ratified and acceded)
Patent Law Cooperation Treaty (1991)
Trademark Law Treaty (2000)
Taxes:Corporate
The corporate tax rate has been steadily decreasing from a high of 30% in the early 2000s. It was gradually cut to the current rate of 18%, but did not reach the previously
planned level of 16% for 2016, given political turmoil and conditions attached to IMF funding. Given Ukraine's uncertain budgetary outlook, further lowering of the corporate
tax rate looks unlikely.
Capital gains are treated as ordinary income and taxed at the standard corporate rate of 18%, with a 15% withholding tax applied to capital gains earned by non-residents
unless bilateral treaties stipulate otherwise.
Legislation passed in 2002 changed the rules on dividend payment, including those on payments to non-residents. Non-residents are subject to a 15% withholding tax on
dividends received. Resident companies (unless they are permanent representative offices of non-resident companies) do not include dividend payments in their gross
revenue. However, dividends received from a non-resident company must be included in the gross revenue.
The law also brought a detailed definition of arm's-length pricing for the purposes of transfer pricing, an extended definition of leasing, plus measures to allow leasing
payments to be written off, provisions for the write-off of employees' life insurance premiums and supplementary pension insurance.
Finally, it introduced measures to guard against the abuse of loss carry-forward measures. The tax authorities are allowed to make "non-regular inspections" to determine
whether taxpayers' claims of losses are correct.
Depreciation of assets takes place according to the declining balance method, but the straight-line method can be used for intangible assets with a useful life of fewer than 10
years. Qualifying small legal entities may use the simplified taxation.
Individual
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Personal income tax is levied at a unified 18% rate. The standard rate is applicable to most types of income, including salary income, dividends, royalties and investment
income. There is a 10% income tax rate for those employed full-time in dangerous conditions, such as underground mining or state emergency response services.
A person is considered tax resident if they have a place of abode in Ukraine, or, in case of their having places to abode in more than one country, if the centre of their interests
is in Ukraine. Taxable income of foreign nationals who are tax resident in Ukraine is determined in the same manner as for Ukrainians. Non-residents are liable for tax only on
their Ukrainian source income.
Indirect
VAT law came into effect in October 1997, and has been amended several times since. As of 2016, the current rate is a basic 20%; and reduced rate of 7% (applicable to
pharmaceutical and healthcare products). Since January 2012, VAT invoices have been filed electronically. Since January 2016, VAT invoices must be filed electronically only
.
There is a 0% rate for the following types of transactions: the export of some goods and services, the sale of coal, and the sale of electricity. Furthermore, certain transactions
are exempt from VAT altogether, such as certain security transactions, the leasing of residential property, payments under financial rental contracts, the transfer of secured
property to a creditor, insurance services, and certain financial services. Some transactions associated with healthcare, education and publications are also exempt.
Infrastructure
Overview
Much of Ukraine's infrastructure was inherited from the Soviet Union following the dissolution in 1991. Following the collapse of the Soviet bloc, particularly in the 1990s, the
new country did not have the financial means to invest in the proper maintenance and development of new infrastructure. Although investment has gained traction since the
early 2000s, this has been set back by the internal instability, especially following the start of the armed conflict in Donbass in 2014. A significant number of rail and road
bridges have been destroyed in the fighting in Donetsk and Luhansk regions, and investment will take a long time to recover. Continued shelling and bombing along the
geographically stable line of contact in Donbass is likely to further damage Ukrainian infrastructure in the area. However, there are some new projects aimed at improving the
infrastructure in other parts of the country which are unaffected by the conflict.
Roads
The Ukrainian surfaced road network amounts to over 172,400, 95% of which have hard surface. Much of the road network is in need of repair and modernisation. There are
very few motorways in Ukraine: the majority of roads pass through urbanised areas, which has a negative impact on speed limits on the roads.
The continued fighting in Donbass caused significant damage to the roads in the region, especially in the vicinity of Donetsk, Horlivka and Bakhmut. Significant investments
would be required for the rebuilding the damaged roads.
Kiev has metro (consisting of three lines and 52 stations), bus, trolleybus, and tram networks, provided by separate municipal operators. There is also a suburban rail service
and river ferries. Existing operators may soon be replaced by a single citywide authority. Lviv, Donetsk, Odessa, Dnipro and Kharkiv all have bus, trolleybus and tramway
services, with the latter two also having a city metro systems.
Railways
The Ukrainian rail transport network spreads across 21,655 km (9,729 km electrified), mostly of the 1,520-mm gauge typical for the former Soviet Union. Ukrzaliznytsia is the
national state-owned railway company of Ukraine. It controls all railways in the country except: intra-company industrial railways, local military railways, municipal metro
systems, railways in Crimea (annexed by Russia in March 2014) and in areas of Donetsk and Luhansk regions under the separatist control. The railways are split into six
geographical regions: Donetsk, Lviv, Odessa, Southern, South-Western, and Near-Dnipro.
The network's most pressing needs are for replacement of deteriorated track, the restoration or replacement of unserviceable rolling stock and the attraction of new
international business to compensate for lost domestic traffic. Express train routes currently operate between Kiev and Kharkiv, Kiev and Dnipro, and Kiev and Lviv, cutting
journey times by half. However, 90% of locomotives and the rolling stock and much of the rail tracks require upgrades, thus having a negative impact on speeds and
timetables.
A significant portion of Donetsk railway in Donetsk and Luhansk regions was damaged by the fighting in the east. Important railway hubs of Debaltseve and Ilovaisk were
badly damaged, and restored by the separatists in 2015 with Russian assistance. The sections of the railways under separatist control are currently being integrated into the
Russian railway network.
Waterways
Ukraine has 1,672 km of perennially navigable inland waterways. The Dnieper and Danube rivers are the most heavily used internal waterways. Key river ports in Ukraine are
Kherson, Zaporizhia, Dnipro, Cherkasy and Kiev on the Dnieper river.
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Airports
Air transport is currently underdeveloped in Ukraine. There are 189 airports with paved runways, 12 of which are major airports. The main development focus has been on
Kiev's Boryspil Airport, which has become the hub for international connections. It is the largest airport in the country, serving 7.3 million passengers in 2015. It currently has
two terminals: a passenger one (Terminal D) built in 2012 and the cargo terminal.. The airport is 29 km from Kiev, but is connected via a high-speed road. The government is
considering building a railway link from central Kiev.
Other significant airports are Kiev Zhulyany, Odessa, Lviv, Dnipro and Kharkiv. Simferopol airport (5 million passengers in 2015) is operated by Russia and has only flights
from the Russian mainland. Airports in Donetsk and Luhansk have been destroyed by the heavy fighting in 2014-2015.
Kiev(Boryspil)
Reference point:
50 21N, 30 53E
Maximum runway length:
3,500 m (11,483 ft)
Runway surface:
Paved
Elevation:
130.2 m
Nearest town/city:
Kiev
Lviv
Reference point:
49 43N, 23 58E
Maximum runway length:
2,510 m (8,235 ft)
Runway surface:
Paved
Elevation:
326.2 m
Nearest town/city:
Lviv
Airports
KIEVBORISPOL
Reference point
N50 20.70 E030 53.70
Maximum runway length
13,123 ft (4,000 m)
Runway surface
Concrete
Elevation
427 ft (130 m)
Nearest town/city
Kiev (airport is 29 km East)
KRYVYIRIG
Reference point
N48 02.60 E033 12.60
Maximum runway length
8,202 ft (2,500 m)
Runway surface
Concrete
Elevation
408 ft (124 m)
Nearest town/city
Kryvyirig
Civilairlines
UkraineInternationalAirlines(UIA)
Ukraine International (established in 1992) flies from its hub at Kiev's Boryspil airport to cities across Europe, as well as to Turkeyand the Middle East. As of June 2016 it had
a fleet of 33 aircraft serving 80 destinations. Since October 2015 it no longer flies to Russia due to the regulatory restrictions on civil aviation between the two countries.
Ports
Ukraine has numerous maritime ports, the main ones Odessa, Chornomorsk, Kherson and Mykolayiv. Other important ports are Berdyansk, Mariupol, and Yuzhne, and inland
ports in Kiev, Zaporizhia, Cherkasy and Dnipro. Ports of Sevastopol, Yalta, Feodosiya and Kerch are located in Crimea, annexed by Russia in March 2014.
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Berdyansk
Location:
Berdyansk port is located on the northeast shore of the Sea of

Azov in Berdyansk Bay, at 46 45N, 36 48E.
Overview
The ports berths handle various kinds of cargo, including
scrap metal and metal products, mainly for export. There is a

passenger terminal for small passenger vessels and internal
passenger liners. It also hosts a special oil transfer complex.
The port is open all year round, although icebreaker
assistance is required for two months over winter.
Traffic
The port handles approximately 500 vessels and 4.5million
figures:
tonnes of cargo annually.
Berths:
Berdyansk has nine berths of varying sizes which are served

by gantry cranes.
Max
The maximum length alongside is 205 m with a draught of
vessel
approximately 7.9 m.
size:
Drydocks
There are facilities for minor hull and machinery repairs only.
and
No drydocks are available.
repairs:
Bilhorod-Dnistrovskyi
Location:
Located at 46 11'N, 30 22'E on the northwest part of the

Black Sea coast, north of the Romanian border.
Overview
Bilhorod-Dnistrovskyi port specialises in handling foreign trade
and coastal cargoes, grain, timber, general cargoes, livestock,

mineral building products and can also handle containers. The
port also includes the port area of Buhaz, located at the mouth
of the Dniester river. Although ice can form in winter, tugs
allow all-year navigation.
Traffic
The port currently handles approximately 200 vessels and
figures:
600,000 tonnes of cargo annually.
Berths:
There are nine berths with an overall length of 1,100 m and

depths of 3.55.2 m. The berths are served by 24 portal
cranes of up to 32-tonne capacity and one floating crane.
Max
The maximum length alongside is 135 m, with a beam of 20 m
vessel
and draught of approximately 4.1 m, but the latter is
size:
dependent on the height of water in the Dniester Liman

estuary.
Drydocks
There are repair facilities available but no drydocks.
and
repairs:
Chornomorsk
Location:
Chornomorsk (known until February 2016 as Illichivsk) is

located on the northwest shore of the Black Sea, near the
Romanian border, at 46 20' N, 30 39' E.
Overview
Chornomorsk port handles a wide variety of cargo and has
year-round navigation, although icebreaker assistance may be

required during severe winters.
Traffic
Approximately 750 vessels visit the port annually handling 14
figures:
million tons of cargo per year..
Berths:
Chornomorsk port has 28 berths divided into three cargo

terminals. The berths are equipped with portal cranes with a
maximum lift capacity of 40 tonnes, and floating cranes with a
lift capacity of 300 tonnes.
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Max
The maximum length alongside is 260 m with a maximum
vessel
draught of 13 m.
size:
Drydocks
Hull and machine repairs are available and some drydock
and
facilities are also available, although they have a maximum
repairs:
draught of 8 m.
Feodosiya
Location:
Feodosiya port is situated on the northwest shore of the Gulf

of Feodosiya, at 45 01'N, 35 23'E in Crimea, since March
2014 under the Russian administration.
Overview
Feodosiya (also spelt Theodosia) port handles general cargo,
roll-on/off and tankers. It is open to shipping all year round
Traffic
The port handles very small amounts of cargo (100,000 tons
figures:
in 2015) due to the Ukrainian restrictions.
Berths:
Feodosiya port has two cargo areas. The general cargo area
has five berths served by 15 electric cranes with a maximum
capacity of 32 tonnes. The oil and petroleum area has two
tanker berths and one oil pier.
Max
The maximum length alongside in the general cargo area is
vessel
150 m with a draught of approximately 7 m. In the oil berths
size:
the maximum draught is 12.5 m.
Drydocks
Minor repair facilities are available although there are no
and
drydock facilities.
repairs:
Izmail
Location:
Izmail is situated on the Danube river at 45 20'N and 28 51'

E, immediately north of Romania.
Overview
Izmail port primarily handles coal, ore and iron ore cargos as
well as a range of general cargos. The port has year-round

navigation, although icebreaker assistance is required for
about 50 days in winter.
Traffic
Approximately 400 vessels visit the port annually handling
figures:
about 4 million tonnes of cargo per year.
Berths:
The port has 23 berths, divided into three cargo areas.

Facilities include 56 gantry cranes of up to 40-tonne capacity
on the quay and three floating cranes of up to 16-tonne
capacity.
Max
The maximum length for ships is 100 m and depths of 10 m.
vessel
size:
Drydocks
There is a ship repair yard in the town of Izmail, close to the
and
port, where various repairs can be undertaken. Drydocks are
repairs:
also available at this repair yard, but not at the port itself.
Kerch
Location:
Kerch is located in the Kerchenskaya Bay, in the Kerch Strait

joining the Black Sea to the Sea of Azov, at 45 22' N, 36 27'
E. Since March 2014 it has been administered by Russia with
the rest of Crimea.
Overview
The port handles general cargo, as well as bulk cargo,
containers, vehicles and grain.
Traffic
Approximately 6 million tonnes of cargo are handled annually,
figures:
mostly in transit from mainland Russia.
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Berths:
The port has two handling terminals with 10 berths. These are
served by one floating crane with a capacity of 100 tonnes
and 31 gantry cranes with a maximum capacity of 32 tonnes.
Max
The maximum length for ships is 100 m and depths of 10 m.
vessel
size:
Drydocks
Hull and machinery repairs are available at the port. There are
and
also two floating dry docks with a lifting capacity of 8,500
repairs:
tonnes and 5,000 tonnes.
Kherson
Location:
Kherson is located on the right bank of the Dnieper river,

around 90 km from the Black Sea coast, at 46 38'N, 32 37'E.
Overview
The port handles oil products, general and dry bulk cargo.
Icebreakers are required to keep the port open throughout the

year.
Traffic
Approximately 2.8 million tonnes of cargo are handled and
figures:
1,900-2,000 vessels visit the port annually.
Berths:
The port has 10 standard berths, and three breakwater berths,

including two tanker berths. These are served by a grain
elevator, cranes with a capacity of 10 tonnes and floating
cranes with a capacity of 150 tonnes.
Max
The maximum length for ships is 200 m and a draught of 7.6
vessel
m. The tanker berths have a maximum length alongside of
size:
125 m.
Drydocks
Minor repair facilities are available although there are no
and
drydocks.
repairs:
Mariupol
Location:
Mariupol is located on the northern shore of the Sea of Azov,

at the mouth of the Kalmius River, at 47 06'N, 37 35'E. The
port is located only about 25 km west of the line of contact
between the Ukrainian army and the pro-Russian separatist
militants.
Overview
Year-round navigation is possible except for a 30-90 day
period of ice when entry requires icebreaker assistance and

can be attempted by ice-strengthened vessels only. The port
has special grain and coal harbours.
Traffic
Mariupol handles approximately 9 million tonnes of cargo,
figures:
1,500 vessels and 10,000 20-foot equivalent unit (TEU)

containers each year.
Berths:
The port has 18 berths. At these berths there are there are
portal cranes of up to 40 tonnes capacity. There are also
floating cranes with lifting a capacity of up to 100 tonnes and
other cargo handling equipment including coal (belt-type)
loaders and facilities for handling containers.
Max
The maximum length alongside is 240 m and draught 8 m.
vessel
size:
Drydocks
Repair and potentially drydock facilities are available through
and
the Ship Repairing Yard and ASCO Technical Maintenance
repairs:
Base.
Mykolaiv
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Location:
Mykolaiv is located at the mouth of the Pivdennyi Buh River,

at 46 58'N and 31 58'E, and is linked to the Black Sea via a
dredged canal.
Overview
The port handles ferrous and non-ferrous metals, bulk fertiliser
, equipment, bulk grain and foodstuffs. The port is open for

navigation all year round, but in winter traffic through the
approach channel is permitted only in convoys escorted by
icebreakers. Ice begins to form in the second half of
December and finally disappears in the channel and estuary
in the first half of March.
Traffic
Mykolaiv handles approximately 5 million tonnes of cargo
figures:
annually.
Berths:
The port has 14 berths with cranes of up to 40 tonnes

capacity. There are also five floating cranes with a maximum
capacity of 100 tonnes. Open and warehouse storage space
is available.
Max
The maximum vessel length is 215 m with a draught of 9.8 m.
vessel
size:
Drydocks
Facilities are available for all types of repair. In addition there
and
are drydock facilities.
repairs:
Odessa
Location:
Odessa is located on the northwestern shore of the Black Sea

, in the southwestern part of Odessa Bay, at 46 30'N and 30
45'E.
Overview
Odessa is one of Ukraine's principal ports and is open for
navigation all year round. As well as its various cargo

terminals, it also has a special oil tanker terminal.
Traffic
Odessa handles approximately 14 million tonnes of cargo, 24
figures:
million tonnes of oil products, 4 million passengers and

100,000 TEU containers in 1,200 vessels annually.
Berths:
The port has 26 cargo berths, along with two container berths
at the container terminal, five oil tanker berths and seven
passenger berths. These are served by gantry cranes with a
capacity of 40 tonnes, standard cranes with a capacity of 40
tonnes and floating cranes with a maximum capacity of 100
tonnes.
Max
The maximum vessel length alongside is 270 m with a draught
vessel
of 13 m and beam of 40 m.
size:
Drydocks
All types of repair can be carried out at the port and drydock
and
facilities are available.
repairs:
Major
Odessa has been known as a major transit point for the illegal
issues:
trade in small-arms, many of which were manufactured in the

Moldovan separatist region of Transdniestria. However, the
level of this smuggling is thought to have decreased
significantly in recent years.
Yalta
Location:
Yalta is situated on the southern side of the Crimean

peninsula, at the head of Yalta Bay, at 44 30'N, 34 10'E.
Since March 2014 it is administered by Russia.
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Overview
The port of Yalta used to be a gateway for tourism to Crimea
and has a passenger terminal, as well as more general cargo

facilities. It is open to navigation all year round.
Traffic
It has very little current traffic due to Ukrainian regulatory
figures:
restrictions (100,000 tonnes of cargo annually). Passenger

traffic is possible only from Russian ports.
Berths:
There are nine passenger berths at Yalta, along with three

cargo berths.
Max
The maximum vessel length alongside is 215 m (although
vessel
vessels up to 240 m can be accommodated) with a draught of
size:
8.6 m.
Drydocks
Extensive diesel engine overhauling and repair services are
and
available, although there is no drydock.
repairs:
Yuzhne
Location:
Yuzhne is located on the northwest coast of the Black Sea,

not far from Odessa, at 46 39N, 31 01E.
Overview
Yuzhne is a general cargo port. It is open all year round,
although assistance is required for approximately 30 days in

severe winters. The northern part of the part remains largely
under development.
Traffic
The port handles approximately 35 million tonnes of cargo
figures:
each year.
Berths:
The port has 16 cargo berths and one oil terminal berth,
although more berths are under construction at the northern
port. These are served by 37 gantry cranes with a range of
capacities, four mobile cranes and a single floating crane.
Max
The maximum vessel length alongside is 278 m with a draught
vessel
of 13.8 m and beam of 48 m.
size:
Drydocks
All types of repair can be undertaken at the port, although
and
there are no drydock facilities.
repairs:
Telecommunications
The state-owned telecommunications operator, Ukrtelecom, dominates the fixed-line network, serving around 80% of all connections. The number of fixed lines is quickly
falling due to the switch to mobile communications. In 2014 Ukraine had 10.6 million fixed line phones; by October 2015 the number had decreased to 8.8 million. International
calls are made via satellite or landline to other former Soviet republics and the Moscow international switching centre is used for communication farther abroad. Satellite earth
stations use Inmarsat, Intelsat, and Intersputnik.
The mobile communications market is competitive and dominated by three largest companies Kyivstar, MTS Ukrayina (Vodafone) and Astelit (Life); their market shares as of
2015 were 44%, 34% and 18% respectively. As of 2015, Ukraine had 60.7 million mobile sim cards in use. Since 2015 Ukrainian mobile operators began rolling out 3G
services; 4G services are expected to be introduced in 2017.
As of June 2016 Ukraine had an estimated 19.7 million of internet users (penetration rate of 44.6%). 90% of large cities have access to high-speed internet, medium-sized
towns have 60-70% coverage while small towns and rural areas have 40% coverage by the high-speed internet links.
Security:Overview
Ukraine's security has been severely undermined by the crisis that erupted in late November 2013 after the government abandoned talks on an EU Association Agreement.
The subsequent mass anti-government protests and overthrow of pro-Russian president Viktor Yanukovych in February 2014 sparked a military intervention by Moscow in
Crimea, followed by the Russian annexation of the peninsula in March 2014. Sparked by these events, and with material and financial support from Russia, an armed uprising
began in Donetsk and Luhansk regions in eastern Ukraine. The armed conflict stabilised geographically in February 2015 along a stable line of contact between the Ukrainian
military and the separatist militias. The currently unresolved armed conflict is likely to develop into a frozen conflict in the most likely scenario. These security events
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significantly increased the risks of terrorism and violent protests, especially in the urban centres in southern and eastern Ukraine, as well as in Kiev, the capital. Both the
ultra-nationalists, and the radicalised elements of the pro-Russian population are likely seek to undertake violent action and civil unrest in the future in order to keep Ukraine
destabilised.
Crime
Overview
Crime rates in Ukraine increased sharply since early 2014, partly due to the ongoing armed conflict in the east of the country, presence of militias in Donbass and proliferation
of arms across the country. The murder rate has increased by 50% since 2014; car theft and house burglaries are also rising sharply. Widespread financial crime includes the
rigging of bids for state and municipal contracts, widespread corruption, and money laundering at central, regional and local levels. The line of contact in Donbass is a source
of arms trafficking. Separatist-controlled areas in the east are characterised by even higher crime levels and severe lawlessness.
Organisedcrime
Organised crime in Ukraine has long existed in tandem with certain political groupings. In Donetsk, in particular, there was an organised crime nexus tied to politics, business,
and law enforcement. Organised crime in Donetsk was one of the forces that initiated an anti-Kiev uprising in April 2014 and supported the separatism of the self-proclaimed
Donetsk People's Republic (DPR). Major business groups controlled and used organised crime groups to undertake a variety of tasks against their competitors and perceived
threats. The main effects of this on business life are extortion demands and a rise in violent crime. The murder rate has more than doubled since the late Soviet era because
of turf wars and contract killings targeting local businesses; it consequently increased again after the start of the armed conflict in Donbass thanks to the increased
proliferation of guns. Bomb attacks targeted at individuals, as opposed to material assets, have also risen in frequency. Instances of violence against foreigners are rare; they
are more likely if foreigners have stake in assets of economic value in Ukraine. However, with the continued armed conflict, high risks of terrorism and violent protests, as well
as deteriorating living conditions and rising unemployment, crime levels are likely to remain high in the one-year outlook.
Trafficking
Drug
There is growing evidence that Ukraine has become an important transit country for Afghan heroin bound for Germany and the UK, as well as to the new EU member states in
Central Europe such as Poland, Hungary, and Bulgaria.
The Ukrainian Security Service (Sluzba Bezpeky Ukrayiny: SBU) has reported a number of large drug seizures over the past five years, including heroin and synthetic drugs.
Although not a primary route, heroin flowing from Afghanistan through Central Asia and Russia, and through the Caucasus and Black Sea, is trafficking into and through
Ukraine, serving both the growing domestic market and those farther afield in Western Europe.
The armed conflict in eastern Ukraine facilitated drug trafficking via Donetsk and Luhansk, which since April 2014 have been out of reach for the law enforcement agencies in
Kiev. Due to the lack of control on the Russo-Ukrainian border in Donetsk and Luhansk regions, smugglers use the Donbass route more frequently than before. As the
security services along the line of contact in Donbass are more concerned with guns and ammunition trafficking, they do not specifically target drug smuggling.
Human
Ukraine is both a transit and source country for human trafficking and has been included in the US Department of State's Trafficking in Persons Report as a country with a
significant number of victims of human trafficking. People being trafficked from Central Asia, Russia and Moldova pass through the country on their way to Europe, while
Ukrainians themselves are also trafficked to the lucrative European and Middle Eastern markets. According to the International Organisation for Migration report of 2015,
since 1991 about 160,000 Ukrainians have been trafficked for the use as sex workers, beggars, forced labourers or organ donors. Due to the conflict in Donbass, which
displaced at least 1.7 million people since 2014, the problem of trafficking became more acute in the recent years.
The port of Odessa and Kiev's two airports have been identified as key way stations on the Eastern European human-trafficking routes. Russian organised crime gangs have
been identified as key players in the regional trade, although Ukrainian gangs are also believed to be heavily involved.
Financialcrime
Ukraine ratified the Strasbourg Convention on combating financial crime in 1997, but failed to adopt a special legislation and a set of amendments to the criminal and banking
codes, despite establishing some working groups on the issue. For this reason, FATF, a respected international agency for combating financial crimes, blacklisted Ukraine as
a non-co-operative state in 2001. The incidence of financial crime has increased in recent years due to political and economic instability. The country is currently off the
blacklist because of its proven effort to take legislative steps against financial crimes, especially since the change of government in Kiev since 2014. A database of financial
fraud cases is currently being established. In June 2016, Interior Minister Arsen Avakov said that there were plans to establish a unified investigative body charged with
fighting financial crime.
Weaponsproliferationandprocurement
2016IHS.
page 41 of 43
Ukraine has traditionally been a major arms producer and exporter. This has, in the past, led to accusations of illegal weapons transfers to other states. European authorities
claimed that during the 1990s Ukraine was involved in the illegal trafficking of arms to the Taliban in Afghanistan, while the non-governmental organisation Human Rights
Watch has filed reports concerning alleged Ukrainian arms transfers to rebels in Sierra Leone during that country's civil war in the 1990s. The US has also accused Kiev of
exporting arms to Iraq in the face of international sanctions in 2000, although the Kolchuga radars allegedly sold were never found by US-led coalition forces after their 2003
invasion of Iraq. Nonetheless, there seems little doubt that Ukrainian arms have been exported illegally, although this illicit traffic was curtailed somewhat during Yushchenko's
presidency.
Ukraine inherited massive stockpiles of weapons after the break-up of the Soviet Union. Although its nuclear warheads were returned to Russia, its conventional stockpiles
have remained, often being kept in less-than-secure holding areas. The UN 2006 Small Arms Survey estimated that Ukraine holds over seven million military firearms. These
factors have led to the risk that Ukrainian weapons might have been illegally trafficked. In the 1990s, large volumes of Ukrainian arms were allegedly illicitly exported to
conflict zones, such as Sierra Leone.
Ukraine experienced serious problems keeping track of its military equipment. Theft and illegal sales of weapons and non-combat equipment were widespread. Previous
Ministry of Defence inventories have indicated that USD190 million of military stock had gone missing. Ukraine's officially declared annual revenue from the sale of military
equipment is USD3 billion. It is likely that this only represents a small fraction of the real volume of Ukraine's military trade when illicit exports are taken into account. Since
2004, numerous military officers have been charged with corruption and abuse of office relating to the sale of military equipment.
Highlights
Ukraine's internal stability has been severely undermined since the beginning of 2014. Mass anti-government protests in November 2013February 2014 turned violent and
eventually resulted in former president Viktor Yanukovych being deposed and impeached by parliament and fleeing the country after over 100 people had died in Kiev. This
sparked a sequence of events which saw Russian military forces deployed to Crimea to support pro-Russian separatists, and a subsequent 16 March 2014 referendum that
formalised the peninsula's annexation by Russia. Since then the generally pro-Western governments in Kiev had to juggle its efforts to deter the armed conflict in the east of
the country, where the separatist militants received financial, political and military support from Russia to gain control over about 35% of the land area of Donetsk and
Luhansk regions, and the challenges of the political, judicial and economic reform and the anti-corruption drive. Since February 2015, following signing the Minsk II ceasefire
agreement and the loss of Debaltseve, an important rail and road hub, to the separatists, the line of contact in Donbass remained quite stable, reinforced by both warring
parties. The armed conflict in the east, with its periods of de- and re-escalation, is most likely used by Russia as a lever to destabilise Ukraine from within; Russian military
involvement in the conflict stopped short of an open invasion. Continued armed conflict, elevated risks of terrorism and protests and riots have led to a significant increase in
the security risk scores for the country, including areas outside the conflict hotspot in Donbass. Against this backdrop, Ukraine's economy has continued to struggle, despite
financial help from the IMF and from the Western donors. The change of the cabinet in April 2016 increased government instability, further damaging Ukraine's economic
prospects. However, the fragile coalition government survived its first six months in the office and with the improving macroeconomic indicators is likely to survive into 2017.
Economicoutlook
activity.
2016IHS.
page 42 of 43
2016IHS.
page 43 of 43
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Country Reports - Ukraine

28 Oct 2016 Country Risk | Profile

Thelikelihoodoflastingpeaceintheeastislow. Fighting between government security

Country Risk Ratings (Strategic Risk) - Ukraine

Note: 0.1 = minimum risk, 10.0 = maximum risk.

Sovereign Risk Ratings - Ukraine

expected to remain heavily dependent on concessional borrowing from international donors.

Next contest: 2019 May; Last contest: 25 May 2014.

Next contest: 2019 October; Last contest: 26 October 2014.

Petro Poroshenko (since 7 June 2014)

Volodymyr Groysman (since 10 April 2016)

Dmytro Shymkiv (since 1 September 2015)

Ivanna Klympush-Tsyntsadze (since 1 September 2015)

Pavlo Rozenko (since 2 December 2014)

Stepan Kubiv (since 3 February 2016)

Volodymyr Kistion (since 1 September 2015)

Vyacheslav Kyrylenko (since 2 December 2014)

Source: IHS and CIRCA People in Power

Strong political and economic influence of certain powerful businessmen, often

Black Sea; physical proximity to the EU market.

owning media assets and involved in politics at all levels.

Improved regulatory environment following accession to the World Trade

to improve business environment in the long term.

transit to Central Asia.

Next contest: 2019 May; Last contest: 25 May 2014.

Next contest: 2019 October; Last contest: 26 October 2014.

Petro Poroshenko (since 7 June 2014)

Volodymyr Groysman (since 10 April 2016)

Dmytro Shymkiv (since 1 September 2015)

Ivanna Klympush-Tsyntsadze (since 1 September 2015)

Pavlo Rozenko (since 2 December 2014)

Stepan Kubiv (since 3 February 2016)

Volodymyr Kistion (since 1 September 2015)

Vyacheslav Kyrylenko (since 2 December 2014)

Source: IHS and CIRCA People in Power

Petro Poroshenko Bloc

Radical Party of Oleh Lyashko

All-Ukrainian Union "Fatherland"

Average time to clear customs* (days)

Time to resolve insolvency (years)

Time to prepare and pay taxes (hours)

42,539,000 (Monthly official estimate, 1 April 2016)

The official state language is Ukrainian. Russian and other

Orthodox and (Byzantine-rite) Uniate Catholic

Russian Federation, Poland, Belarus, Moldova, Romania,

Kiev Boryspol (Borispil) International

Vice Prime Minister for Reforms Implementation

Vice Prime Minister for European Integration

Vice Prime Minister for Social Policy

First Vice Prime Minister; Minister of Trade and Economic Development

Vice Prime Minister for Humanitarian Issues

Minister of Foreign Affairs

Col.-Gen. Stepan POLTORAK

Minister of Internal Affairs

Minister of Energy and Coal Industry

Minister of Education and Science

Minister of Agrarian Policy and Food

Minister of Social Policy

Source: IHS and CIRCA People in Power

Source: IMF, Direction of Trade

Source: IMF, Direction of Trade

1. Retail trade - total

6. Public Admin. & Defense

8. Health and social services