Ukraine is set for a new lease of life: A country at war tries to return both to normality and the bond markets

Jasper Jolly
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Ukraine's growth is expected to be two per cent this year (Source: Getty)

Ukraine's prospects are looking up.

Two years ago, the country’s then finance minister Natalie Jaresko was seeking fiscal aid. The economy was shattered by war with Russia, which saw GDP plummet by 9.7 per cent in 2015.

Things look rather different for her successor. Oleksandr Danylyuk, a former executive with consultant McKinsey in London, took over in early 2016, just as the economy started to rebound.

Earlier this month, he returned to the capital to sell investments in an economy which the International Monetary Fund (IMF) says may be on the verge of a boom.

Growth will be two per cent this year, Danylyuk predicts, before accelerating to three per cent in 2018, in line with IMF forecasts.

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Even with the shadow of its aggressive neighbour still casting a pall over the east of the country, Danylyuk projects a palpable confidence in his country’s prospects.

“Given where Ukraine is, we can easily grow six per cent [in a year],” he tells City A.M.

On the back of the expected rebound, the Ukrainian government is looking to re-enter international bond markets for the first time since 2013, potentially with an autumn issue.

The exact amount to be issued has not yet been decided, Danylyuk insists, although a figure between $500m (£385m) and $1.5bn currently seems most likely.

Reform agenda

The success or failure of reforms will be the driving force for demand for Ukrainian debt, with big changes in energy, healthcare and a new land market on the way.

Danylyuk says: “All the reforms we are doing are actually aimed at making these sectors attractive to investors. We understand that internal resources are limited.”

The government has already made big and sometimes domestically unpopular changes, including the removal of energy subsidies.

They are also set to introduce a requirement for pensioners to pay tax for a minimum number of years before they can draw a state pension, a move which will broaden the tax base.

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Another central plank of the changes is the fight against corruption. “There is close to zero tolerance for corruption in Ukraine,” says Danylyuk.

The Euromaidan revolution in 2014 which brought the current government of President Petro Poroshenko to power was driven in part by frustration with the cronyism of the previous government.

Yet Ukraine ranks 131st in Transparency International’s Corruption Perceptions Index, level with Iran and Russia, and corruption in the private sector is much lower down the list of priorities, Danylyuk admits.

“Not many people in Ukraine think about [private sector corruption] this way,” he says. “The corruption thing is something happening within the state, the government.”

The bear in the East

If corruption was one driver of the 2014 revolution, the other was the chance to throw off the yoke of Russian influence and move closer to Europe.

Russia’s response was brutal, annexing Crimea to the south and the thinly-veiled instigation of a separatist occupation in the eastern Donbas region.

The prospect of a frozen war that occasionally flares up into violence is hardly conducive to a thriving economy, and Russia is still capable of turning the screw: a trade blockade this year may have knocked a whole percentage point off annual growth.

However, Danylyuk is relatively sanguine about the Russian threat, which he characterises as an expensive “artificial boost of patriotism” by Vladimir Putin.

Ukraine has completely weaned itself off Russian energy imports since 2014, while recent economic growth proves the country is “resilient”.

“There is not much they can do actually to further destabilise [Ukraine], so it’s a good signal,” says Danylyuk. “I’m very optimistic.”

Unsurprisingly, Danylyuk is firm that sanctions on Russia must remain in place, praising the US, France and the UK, “one of the most reliable partners”, for their pressure.

While pushing for the international community to ostracise Russia, the longer-term vision for his country – the vision he is selling to investors – is a globalised Ukraine more deeply embedded in the institutions of the West.

“It’s an open, vibrant economy, deeply integrated with the European Union free-trade area, but also having very extensive links with other countries,” he says. “It will be a totally new economy.”

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