Probably the only way the DCFTA (Deep and Comprehensive Free Trade Agreement) will now be delayed from implementation on Jan. 1 is if the decision to delay now comes from Kyiv, which seems unlikely, given everything the country has been through over the past two years, and would risk further domestic political instability if that were the case.
Just note in terms of Ukraine’s economic vulnerabilities now to Russia, these have actually reduced very significantly:
* Trade turnover has collapsed already over the past two years, from Russia accounting for 30 percent, to likely 10-11 percent at present.
* Energy – gas consumption has dropped sub-40 billion cubic meters, imports from Russia to 6.5 billion cubic meters this year, from something like 14-15 billion cubic meters last year, with the assumption of no need for Russian gas imports next year, if Ukraine can buy on the European market. Recently with the disruption of utility supplies to Crimea, there have been disruptions in coal supplies from (Kremlin-separatist areas, with 30 percent of Ukrainian coal mines, and this could cause short-term problems in terms of electricity generation, but the assumption is that there are enough stocks of coal still to get by if the winter is mild/average.
* Debt – by changing International Monetary Fund rules over lending into official arrears, the West will reduce the vulnerability from the $3 billion December 2015 Eurobond and any Russian effort to force a more damaging and generalised default. Note the risk factor still is if non-payment stalls the IMF programme, which seems unlikely if IMF policy is changed.
* Banks – Russian banks, which had something like a $25 billion balance sheet exposure in Ukraine have proven unwilling to hand back the keys, and instead have “behaved” by recapitalising as need be and despite huge non-performing loans and capital erosion. I think there is recognition in Moscow that once they hand back the licenses they are not going to get them back easily, and this will further reduce economic/financial links, and Russian leverage going forward.
My take (see also the German Advisory Group report from March) is that (the separatist-held areas) and the loss of Crimea as yet do not pose that much of a drag on the recovery of the rest of Ukraine.
True there remains the latest risk if there is a re-escalation of fighting in the east, and the loss of further territory and infrastructure assets.
But as is the “frozen” conflict does not pose a terminal risk to recovery in Ukraine – the bigger risks now are domestic politics in Ukraine, foot-dragging on implementation of the IMF programme, and oligarchic capture of the anti-graft agenda, meaning that rule of law reforms stall, which itself could see Western financing stall and opportunities missed.
It is debatable whether this would bring an immediate unwind in recent macro stabilisation or whether disengagement from the IMF could still see Ukraine muddle along for a period. But without rule of law, this is a debate whether Ukraine will grow at 2 percent for the long term, or the 5% pa which is very possible and would actually transform the country.
