While Ukraine's political situation remains uncertain, its economy teeters on the brink

If the political instability is not reined in soon enough, the currency will spiral out of control.

As the protests in Ukraine have escalated over the last three months, President Viktor Yanukovych has appeared progressively weaker. The timing of his sick leave last week could not have been more apt. The president has now offered a raft of substantive concessions in a bid to appease the protesters, not least the chance to lead a new cabinet, but in every instance he has been rebuffed. His subsequent decision to take leave was a signal that his options have rapidly reduced.

The government’s resignation was a serious blow to Yanukovych’s legitimacy. Without a cabinet underneath him he has become an isolated figure. The opposition recognises this and in the ensuing negotiations will maintain their stance of demanding early presidential and parliamentary elections.

As a western observer, one could be forgiven for thinking that there is an overwhelming majority of Ukrainians in favour of EU integration, with Vladmir Putin and Yanukovych the only figures standing in their way. But in reality the country is bitterly divided: Western Ukraine has very strong cultural and linguistic ties with Russia, and its inhabitants are deeply concerned about the impact of competition from the EU on its dilapidated, yet important industrial sector. Even the opposition is not unified, and it is difficult to reconcile the views held by the far-right nationalist party, Svoboda (which is at the vanguard of the current movement), with the EU’s supranational mantra. In any case, an election held in the current atmosphere would surely serve as a de facto referendum on EU integration, but it would undoubtedly be a close-run contest.

While Ukraine’s future continues to be contested, its economy teeters on the brink. So far Russian bond purchases and gas price concessions have provided a financial buffer, but if Yanukovych’s grip on power is eroded further and an opposition-led government becomes more likely, this support could be revised and potentially withdrawn. The EU would not be able to step in without major political reforms inside the country and in the meantime bond yields would rise amid sustained downward pressure on the currency.

Moody’s have already downgraded Ukraine’s sovereign rating to Caa2 with a negative outlook, citing growing strains on liquidity caused by the surging demand for dollars as the domestic population seek to convert their savings. On 31 January the hryvnia fell 2.5 per cent against the dollar – the largest single-day loss in almost five years. This is of significant concern, as with a USD15 billion loan from Russia, the government had spent several weeks using its financial reserves to prop up the country.

As the central bank has scaled back its commitment to maintaining a dollar-peg, this downward pressure is manageable in the short-term. Within the context of low inflation and slow export growth, it could even provide a boost. The danger, however, is that if the political instability is not reined in soon enough, the currency will spiral out of control, placing increased pressure on the corporate and financial sectors so as to impinge on their ability to service foreign debt.

The insurance market is acutely aware of this risk, and accordingly, capacity for credit cover on Ukrainian counterparties is exceedingly tight. It is set to remain so for the rest of Q1 and beyond.

Anti-government protesters on a barricade in Kiev on 7 February, 2014. Photograph: Getty Images.

JLT Head of Credit & Political Risk Advisory

Photo: Getty
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.